Savings rates continue their freefallFunding for Lending still hitting savers

08 February 2013

Savings rates fall

Savings rates continue to tumble as the effect of the government's Funding for Lending scheme continues to bear down on savers.

Earlier this week, research from Moneyfacts revealed that average cash Isa rates have fallen to 1.74%, plummeting from 2.55% just a year ago. And new Which? research uncovers that the savings freefall has spread across all types of savings products. 

The Funding for Lending scheme, which was launched in August 2012 with the aim of providing cheap finance to banks to fund mortgage lending. But the knock-on effect appears to be that banks are cutting interest rates on savings accounts because they can afford to rely less on customer deposits.

Savings rates tumble in the past six months

Back in July 2012, the best instant-access savings account available paid 3.20% AER. This meant that a lump sum of £10,000 would earn £320 in interest (before tax) over a year, assuming no withdrawals were made. But today, the best rate has plummeted by 1.2% to 2% – you'd see a return of just £200.

Until very recently, one of the best ways to guarantee a decent rate of interest was to lock your money away for a fixed period – the longer the term, the higher the rate of interest you'd receive. Six months ago, the best five-year fixed-rate bond paid an impressive 4.20% – if you deposited a lump sum of £5,000, you'd make a healthy return of £1,142 before tax over the term.

Today, the best rate for this type of account stands at a paltry 3.10%, so after five years you'd be left with just £824 on top of your initial deposit of £5,000. Worse still, after tax the rate on a five-year account isn't enough to beat inflation (measured by the consumer prices index, or CPI), which currently stands at 2.7%. So you'll actually be losing money in real terms.

Short-term accounts beating long-term accounts

And even more worrying is that the positive correlation between longer fixed terms and interest rates now seems to be disappearing altogether. At the time of going to press, no four-year fixed-rate account pays more than the best rate three-year account (2.95%), while only one four-year account beats the best two-year account. 

Incredibly, you can now earn more by putting your money in the best rate instant-access Isa rather than locking it up for any other length of time in another Isa. The best instant-access Isa from Cheshire Building Society paying 2.5% can only be matched by Halifax's five-year Isa Fixed Saver account.

Boost your savings

To find out if your savings account is paying a competitive interest rate, check out the Which? Savings Rate Booster tool and switch your account for a better deal if necessary.

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