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5 Aug 2019

Exclusive: are fixed-term savings rates about to boom?

Which? Money looks into the future of savings rates

In welcome news for savers, rates on fixed-term accounts could be set to spike over autumn, as exclusive Which? Money research reveals the best times to lock away your cash.

An analysis of Moneyfacts data on one- and five-year fixed-term savings accounts over the past five years shows how both top and average rates have fluctuated over the years.

We found the month you choose to open a fixed-rate account could make a big difference to your returns. Someone saving £10,000 in February 2018, when rates averaged 1.65%, would earn £112 less in interest than in September that year, when the average rate was 1.86%,

While that may not be a life-changing amount, why not make your money work as hard as it can?

Here, we reveal the factors behind the rate peaks and troughs, and predict what could happen to savings rates in the months to come.

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Best and worst time to open a fixed-term account

Across both one- and five-year savings accounts between 2014 and today, we observed several seasonal trends that could affect your interest.

Average and top rates rose in August and September in four out of the five years we analysed. The exception was 2016, as rates fell in every month of the year leading up to and following the base rate drop in September of that year.

You can see how this looked in the graph below, which shows the average rates for five-year fixed-term savings accounts, using data from Moneyfacts.

It's a similar picture when it comes to one-year fixed-rate accounts. The graph below shows how the average rates have fared since 2014.

Both graphs show that rates in the majority of years dropped in April.

This could be down to competition between savings and cash Isas. As the tax year ends on 5 April, many cash Isa providers increase rates to encourage savers to use up their remaining Isa allowance.

With Isas taking savers' attention, it's logical that savings account rates will drop, as providers don't want or need to compete for deposits.

Why is there an August/September uplift?

The reason why savings rates tend to increase around August and September could be traced back more than a decade.

Kevin Mountford, chief executive of Raisin UK, said savings rates rose at a fast pace over August, September and October 2007, just ahead of the financial crash. Offers peaked at a top rate of 6.3% - unthinkable in today's climate.

Savers rushed to open fixed-rate accounts, meaning many savers' bonds still mature in these months of the year. In a bid to attract these customers, providers often increase rates around the same time.

Lifestyle factors also have an influence, Mr Mountford said: 'Banks know that no one's thinking about saving when the weather gets warmer, as most people are off on their summer holidays. Similarly at Christmas, people are spending money rather than saving it.'

This is borne out by the savings data. Average one-year rates in four of the six years dipped in June, while three of six years lifted in February, once savers had hopefully recovered from their festive spending.

Banks need to finance October's remortgaging boom

We recently wrote about the £26bn of mortgages due to come to the end of their introductory terms in October.

Mortgages and savings are intrinsically linked, as providers will use savers' deposits to lend to mortgage customers.

With such a large number of remortgaging deals to be funded, it's likely that banks will hike rates on their savings products to entice savers to make a deposit.

Competition between banks is likely to be fierce, both to offer competitive savings deals and low mortgage rates, so savers could see unusually generous AERs.

Factors that may dampen savings rates

While some signs point to an upcoming savings rate rise, other issues could counteract the trend and keep rates low:

  • Brexit: the next deadline for Brexit is the end of October. The fact that so much is still unknown about a potential EU deal - or whether there will be a deal at all - may lead banks to be more cautious than they ordinarily would be.
  • Base rate changes: If the Bank of England chooses to change the base rate, this is likely to have a knock-on effect on savings rates. If the base rate falls, AERs are likely to dip - as was seen in September 2016. At its latest meeting this week, the Monetary Policy Committee signaled the base rate could move in either direction, depending on the form Brexit takes.
  • Savers' appetite for fixed rates: Savers are increasingly taking money out of their fixed-term accounts, instead transferring it to instant-access accounts, recent Moneyfacts data shows. While Brexit uncertainty could be to blame, instant-access rates have been increasing recently, so people may be seeking more flexibility. If providers focus on the instant-access markets, fixed-rate account rates may stagnate.
  • Find out more:how to find the best savings account

Should I wait to get a new fixed-term account?

While it's possible to examine historical trends and factors that influence rates, we can't actually predict the future.

If you're looking to move your savings into a higher-paying account, and you've found a rate and provider that suits your circumstances, you should go for it, regardless of the time of year.

As long as your cash isn't left languishing in an account that pays 0.10% AER - and there are plenty out there that do - your savings will still be earning.

It's also worth keeping an eye on inflation, which is currently at 2%. As long as your money is growing at the same rate of inflation or better, your money won't be losing value in real terms.