Why fixed-rate savings accounts are soaring

Highlights

  • The demand for the fixed rate products has almost doubled in six months, as Savers are chasing for a decent return on their investments after a pandemic-led in money heading into easy-access.
  • According to research by Paragon Bank, the Average easy-access balance surged by £1,450 to £11,696 from £10,246 when the pandemic began.
  • The National Institute of Economic and Social Research has warned that inflation levels in the UK are expected to hit 5% in 2022.

Savers chasing for a decent return on their investments are now parking their money in fixed-rate saving accounts after a pandemic-led in money heading into easy access. According to Moneyfacts analysis, the demand for the fixed rate products has almost doubled in last six months, as savers generally prefer to put their money in easy-access accounts that are not much affected by uncertainties and inflation.

According to a research report by Paragon Bank, the average easy-access balance surged by £1,450 to £11,696 from £10,246 when the pandemic began. With high returns achievable through fixed rates products, easy-access products are losing their charm with only 1 in 10 savers looking for these deals at present.

Recently, the National Institute of Economic and Social Research (NIESR) warned that the UK’s economy is in risk of stagnation and sticky inflation for over the coming years due to Brexit, persistent supply chain crisis and soaring energy bills have led to ongoing inflationary trend.

The think tank added that inflation levels in the UK are expected to hit 5% in 2022, with economic growth of 1.7% in 2023 and 1.3% in 2024 after the recovery of 6.9% in 2021 and 4.7% in 2022. Inflation levels have been above 2% target set by the Bank of England over the past months.

Also read: How to plan your investment with inflation touching new highs

Around 49.83% of savers are looking for Fixed Rate Bonds, as compared to 28.42% in March 2021. Around 76.66% of savers are searching for popular accounts such as Fixed Rate Bonds, Instant Access Accounts, Regular Saving Accounts and Notice Accounts, as compared to 56.05% in March 2021.

A total of 21.34% of savers are searching for ISA Accounts, as compared to 19.48% in March 2021. 11% of savers are searching for standard Instant Access Accounts and 2.31% searching for Instant ISA Accounts, as compared to 9.18% and 5.44% respectively in March 2021. Whereas 1.40% looking for Junior ISA Accounts and 2% for Children’s accounts, as compared to 1.99% and 2.22% respectively in March 2021.

Until there is no sign of recovery in economy, guaranteed return on fixed rate bonds seems to be an appealing option for the savers.

Source: Copyright © 2021 Kalkine Media

Darren Cook, Head of Analyzer Products at Moneyfacts, said that the savers are looking for safer investment options for over the next two to three years and its demand data for fixed rate bonds shows a notable rise in past six months. However, some savers may feel rates will not rise substantially in upcoming months and are eager to review the rates on offer right now, off the back of rising rates on fixed rate bonds.

Until there is no sign of recovery in economy, guaranteed return on fixed rate bonds seems to be an appealing option for the savers with reasonable sum of cash. It is expected that the bank base rate rise may be on security, horizon and finding that the current best fixed rates is the option savers are looking for. Not every saver would be comfortable to put their money in riskier investment options until more signs of economic recovery surface. 

Also read: How supply chain crisis is affecting the economic recovery

Safer investments

Savers may get high return on their money by simply choosing to put their cash in the best one year fixed-rate product rather than market leading easy-access products, as competition from smaller challengers in the Fixed-rate products is much higher than the easy-access products, also the difference in returns has grown significantly.

In March, the best one year fixed-rate was 0.56%, just 0.14% higher than the top easy-access and currently, the best one-year fixed bond pays 1.45%, just 0.78% above the best instant access.

Bank of England kept the base rate at 0.1%, tempting savers to park their money in higher paying fixed rate deal.

Source: Copyright © 2021 Kalkine Media

The best paying easy-access deal offered by Shawbrook Banks pays 0.67% and currently, the best market leading one-year fixed rate deal offered by Al Rayan Bank pays 1.45%. It mean a saver with £10,000 deposit will receive £145 as an interest in a year and if it invests these money in the best easy access deal,  saver will receive £67 as interest in a year.   

In March, the best one year fixed rate was paying 0.56% and the easy-access deal was paying 0.40%, there was very little incentive for savers to fix their money.

Recently, the Bank of England kept the base rate at 0.1%, tempting savers to park their money in higher paying fixed rate deal. This indicates that saving rates are unlikely to see improvement anytime soon, enhancing the anxiety for savers as inflation surges.  

Also read- 95% mortgage: All you need to know

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