Instant-access savings rates hit three-year high: is now the best time to open an account?

Interest rates are rising across savings and cash Isa accounts, hitting up to 1.50% AER for both types of easy-access account.

But it's not just the top rates that are on the rise - according to Moneyfacts, the average rate of the six top-rate easy-access savings accounts is currently 1.47%, up from 1.44% six months ago and 1.26% a year ago.

When we analysed the data for instant-access cash Isas, we found that Isa rates are increasing even more rapidly. The current average rate of the top six accounts is 1.46%, up from 1.38% six months ago and 1.25% a year ago.

But are instant-access rates reaching new highs, or have we just gotten used to paltry returns?

Here, we look into the current state and history of instant-access accounts and reveal where you can find the best rates.

What are the current top-rate instant-access accounts?

The table below shows the five top-rate instant-access savings accounts that do not require you to be an existing customer and do not have restrictions based on location.

 _{Source: Which? Money Compare. Correct 24 May 2019.} 

For comparison, the table below shows the five top-rate instant-access cash Isa accounts.

Again, these are the accounts that do not require you to be an existing customer and do not have restrictions based on location.

_{Source: Which? Money Compare. Correct 24 May 2019.} 

Cash Isa rates are more competitive

In contrast to the state of fixed-rate accounts, where savings consistently beat cash Isa rates, the top-rate Isas here are much more competitive, as accounts are all benched near the highest rate.

With savings accounts, Marcus by Goldman Sachs stands relatively alone, with the next-best option paying 0.05% less.

However, we have recently seen a couple of instant-access savings accounts sneak above the 1.5% point in recent months - unlike cash Isas.

That being said, these higher-rate accounts haven't been around for long - when Nottingham Building Society introduced its instant-access account paying 1.55% last year, it was pulled after just two days.

Smaller savers can win big

We recently wrote about how savers who don't have at least £1,000 to deposit often lose out on the top rates - but this isn't the case with instant-access.

Just two top-rate accounts require you to deposit £1,000, and neither pay the top rate. All others can be opened with just £100 or £1.

It's worth noting that, if you open Shawbrook Bank's instant-access Isa, you'll not only need to make an initial deposit of £1,000 but also make sure your account has at least £1,000 saved at all times - otherwise the AER will drop to 0.25%.

Watch out for the caveats

As is commonly the case with instant-access accounts, there are a few quirks you should bear in mind.

Half of the accounts in these tables feature bonus periods - this means the advertised AER rate is for a limited time, and once it finishes you could find yourself on a significantly lower rate.

If you don't want the hassle of switching to a more competitive rate (or know you're unlikely to remember), it may be worth going for an account that doesn't have this feature.

Additionally, the Virgin Money Isa only allows you to make two withdrawals a year - so if you know you'll need to access the cash more frequently, this account won't work for you.

Could rates increase even more?

The graph below shows the average rates for instant-access savings and cash Isa accounts, using data from Moneyfacts.

These averages will not necessarily tell you what kind of return you can expect to get, as the top rates vastly outstrip the average and lower rates lag behind, but they do paint a useful picture on the trajectory of the savings market at the moment.

The average rates for May 2019 show that instant-access savings accounts are at 0.62%, and cash Isas are at 0.97%. While these average rates were slightly lower than April, both are on a broadly upward trend since dipping in 2017 - savings accounts reached a low of 0.36% in April, while cash Isas floundered at 0.64% in February.

And this month, competition is hotting up.

Following the launch of Coventry Building Society's top-rate cash Isa on 8 May, Virgin Money upped its Isa rates to match on the same day. Instant-access products from Post Office and AA have also increased in May.

When were instant-access rates last this high?

Savings and cash Isa rates have been poor in recent years. The average instant-access savings rates haven't been this high since February 2016, and this is a peak for cash Isas that hasn't been seen since July 2016.

But, historically, rates have been much higher. Average rates for both instant-access accounts and cash Isas peaked in May 2012, when the top cash Isa rate stood at an almost unimaginable 3.3% AER, and 10 accounts paid 3% or more.

Similarly, with savings accounts, you could have bagged a rate of 3.17% AER, or chosen from a further eight accounts paying 3% or more.

Many factors have played into the reductions we've seen since then, particularly the introduction of the personal savings allowance - this allows basic-rate taxpayers to earn up to £1,000 tax-free savings interest in each tax year; higher-rate taxpayers can earn up to £500, but those who pay additional-rate tax don't have this allowance.

Once this came into force, the tax-free benefit of cash Isas became less relevant, and savings rates no longer had to be as competitive to win customers.

But after years of putting up with poor returns, it seems the tables finally seem to be turning in favour of savers.