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Spend & Save

Money Insider: Fixed rate bonds on the up, but young savers are getting raw deal

The mutual sector kept up the pressure on the fixed rate savings market this week with improved two- and three-year fixed rates courtesy of Principality Building Society and Yorkshire Building Society's Barnsley brand respectively.

Principality increased its rate by a quarter of a point to 4.25 per cent AER and is just 0.1 per cent off the top spot for a two-year bond, currently occupied by AA Financial Services. Barnsley BS now sits on pole position in the three-year bond market with its online account paying 4.8 per cent AER.

While competition has been keeping rates high in this sector of the savings market, the same can't be said for children's savings accounts. Moneynet.co.uk research has revealed that the average interest rate on an easy access children's account is a miserly 0.98 per cent, with almost two out of five of accounts paying just 0.5 per cent or less.

If we want our children to grow up with some savings behind them and to appreciate the value of money rather than reach for the plastic, providers need to offer better rates and incentives. Offering a paltry £10 interest per year on a £1,000 savings balance isn't the way to get the younger generation visiting their bank on a regular basis.

As with the adult savings market the highest rates are offered for regular savings accounts. The terms and conditions of this type of account tend to discourage withdrawals but help to instil the discipline of saving regularly, with the carrot of fixed rates as high as 5 per cent from Principality BS and 6 per cent from Halifax payable for those who can salt away at least £10 per month for 12 months.

There are only half a dozen providers offering regular savings accounts for children, a sector that is crying out for more innovation and competition.

Mortgage rates and LTV demands edging lower

There were further signs this week that mortgage lenders are starting to feel more confident as Woolwich trimmed rates on fixed and tracker products, but more importantly, also increased its maximum loan-to-value to 75 per cent, the first time they have been prepared to lend up to this level since last autumn.

The new 75 per cent LTV range includes two-year fixed rates at 3.99 per cent with £999 fee or 4.09 per cent with a lower £499 fee, and lifetime trackers at 2.94 per cent (base rate +2.44 per cent) with £999 fee or a no-fee option at 3.34 per cent.

Leeds Building Society unveiled two keenly priced loans for those seeking the longer term stability of a five-year fixed rate. The rate up to 75 per cent LTV is 4.99 per cent fixed with £999 fees and for an 85 per cent LTV loan, a market-leading 5.75 per cent fixed with £999 fees.

Whether it's a tracker or variable rate, we are starting to see increased competition and a revitalised mortgage market driving down the cost of borrowing. While there is likely to be plenty of interest in these latest deals, there are also many borrowers enjoying standard variable rates of sub 4 per cent who will sit tight until we see further cost reductions.

We're losing the savings habit

I was alarmed to read that 28 per cent of parents have no savings and a further 20 per cent have less than £1,000 to fall back on, according to research from Abbey.

With unemployment at a 14-year high and interest rates on savings accounts at rock bottom, it's no surprise that parents are saving less. However, putting a little cash aside each month, rather than continually reaching for the plastic, is a habit that households need to rediscover.

Unless you make a conscious effort to start saving it's one of those things that's too easy to put off.

While there are some good rates paying more than 5 per cent for fixed rate savings accounts, these are no good to someone looking to start their first nest egg. With many instant access savings accounts paying just 1 per cent or lower, there's no incentive to put money into this type of account either.

The solution for newbie savers is a "Regular Saver" account where you commit to saving a specified amount every month for 12 months and are rewarded with a worthwhile rate of interest.

Terms and conditions are quite stringent, and withdrawals rarely permitted, but rates are good, with Norwich & Peterborough BS paying 5 per cent AER, Stroud & Swindon BS and Principality BS both 4.5 per cent AER, and Barclays at 4.25 per cent AER.

Andrew Hagger is a money analyst at Moneynet.co.uk