As chill winds blow through the City, it's springtime for savers

With the banks and building societies desperate to attract cash, high-paying accounts are there for the taking, writes Laura Harding
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The Independent Online

The credit crunch may be tightening its grip on the nation's finances but that doesn't mean there aren't ways to benefit from the squeeze.

While borrowers bear the brunt as mortgage and other loan rates rise and lenders become more cautious about whom they lend to, savers could be the big winners. Some banks and building societies in need of cash, which they can't get from the afflicted international money markets, are offering bumper rates to get customers to deposit with them.

On Thursday the Monetary Policy Committee of the Bank of England reduced the country's official rate of interest from 5.25 per cent to 5 per cent, the third cut since early December. In the normal course of events when the Bank cuts its rates, banks and building societies follow suit. But this time around this isn't happening to the same extent, allowing savers to scoop a rate of interest well above bank base rate.

David Kuo, head of personal finance at comparison site fool.co.uk, says: "Some smaller banks and building societies badly require cash. They used to rely on bigger ones for cash through the money markets but are finding that those big banks are now reluctant to help, so they need to draw in cash from savers by offering better rates."

However, Mr Kuo warns that some of these alluring interest rates could be here today but gone tomorrow: "Some banks are paying out more than 6 per cent interest but only getting 5 per cent from mortgages, so when they are satisfied they have enough funds, they will cut rates back down. I don't think [these savings rates] will be around for much longer, so people should make the most of them."

The logical way to do this is to buy into a fixed-rate savings account, rather than one where the provider can move rates lower at its own whim or through some sort of link to the base rate. Current best buys in this market include Birmingham Midshires, Icesave and Bradford & Bingley, all offering short-term fixed-rate bonds with high rates of interest. Skipton building society, First Save and Cheshire building society offer longer-term fixed-rate accounts requiring a minimum deposit of at least £500 and paying a return of around 6.5 per cent.

But fixed rates come with catches. For example, most limit the number of withdrawals that can be made in a year or specify that no money is taken out for the duration of the deal.

"There is still a lot of competition in the fixed-rate market but you need to think about what you can afford to lock away," warns Rachel Thrussell, head of savings at price-comparison site Moneyfacts.co.uk. "With the Birmingham Midshires account you can't touch it at all, and with others you lose interest if you take money out.

"You should also look at the terms and conditions. People don't understand the implications – they should think about what they need in the long term instead of being swayed by the headline rates on offer."

Those who want more flexible arrangements still have plenty of high-paying accounts to choose from but need to be aware that there is no rate guarantee. Interestingly, similar names feature in the "best buy" tables for accounts where notice is not required before funds are taken out. Bradford & Bingley and Birmingham Midshires both pay above base rate here.

Despite the attractive deals on offer, it is important not to pour money into a savings account if it would be more useful elsewhere – for example, in repaying mortgage or credit card debt. Mike Naylor of comparison site uSwitch.com says: "It doesn't make sense to save if you're borrowing a lot and should be repaying, although everyone should have emergency funds. It's more important that people are sensible and use this time to switch their credit cards or mortgage, move from a current account with low interest to a better deal, or overpay on their mortgage."

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