Interest rates jumped to 3% this week, their highest level for 14 years, meaning mortgage misery for homeowners, but hopefully better returns for savers.

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The Bank of England’s monetary policy committee voted to raise the base rate from 2.25% to 3% on Thursday, the sharpest hike in rates since Black Wednesday in 1992. It is the eighth consecutive interest rate rise since the end of last year.

Despite the fact many savings rates have already increased significantly in response to recent rate hikes, thousands of savers continue to leave their money languishing in accounts paying paltry rates of interest. More than £365 billion is currently held in easy access savings accounts paying interest of 0.25% or less, according to analysis by Paragon Bank, with a further £74 billion sitting in easy access accounts offering returns between 0.26%-0.50%.

Rachel Springall, finance expert at Moneyfacts.co.uk, said: “Savers who want the flexibility of an easy will find the average rate is now over 1%, the first time this level has been breached in a decade, and top rates now exceed 2%. However, there are still accounts out there paying less than 1% and, as we have seen in the past, there is no guarantee that savers will benefit from a base rate rise.

“The majority of the biggest high street banks have failed to pass the full Bank of England base rate rises to easy access accounts, with one brand passing on just 0.14% since December 2021.”

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The best easy access account, the Everyday Saver account from Al Rayan Bank, pays 2.81% on balances of £5,000 or more. As an Islamic bank, Al Rayan Bank will pay an ‘expected profit rate’ instead of interest. Alternatively, Shawbrook Bank and Paragon Bank both pay 2.30% annual interest before tax on minimum balances of £1,000 and £1 respectively.

Kevin Pratt, Forbes Advisor’s UK Editor and financial expert, said “Anyone with an interest-bearing savings account should see an uptick in their income if their bank or building society passes on some or all of the increase. If it doesn't, then it's high time to think about moving to a more rewarding account."

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If you’re prepared to tie up your money for a period of time in a fixed rate savings account, then you could earn much higher returns. For example, ICI Bank is paying 4.6% interest on its one-year fixed rate bond, which can be opened with a balance of £1,000.

Sarah Coles, senior personal finance analyst, Hargreaves Lansdown, said: “If you were waiting for a better rate in order to fix, you’re not going to get it overnight, so you need to be clear about how long you’re prepared to wait, and what rate you’re willing to fix at, or you risk waiting so long you miss out on the best of the rates.

“Given that the Bank expects rates to peak at the end of next year, if you’re fixing for a year you may not want to wait too long, because the banks will start factoring falling rates a year ahead into their fixed rates.

“It’s also well worth bearing in mind that savings rates are forwards-looking, and inflation is backwards-looking – so to keep pace with inflation, you’re aiming to beat the inflation rate forecast for this time next year – which the Bank estimates at 5.2%. Right now you can get up to 4.6% by fixing for a year – which isn’t far off.”

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