Money Insider: Providers battle for maturing NS&I fixed-rate balances

Towards the end of October 2009, NS&I set the cat amongst the pigeons in the savings market when it launched a range of extremely competitive fixed rate bonds. The stand-out product at the time was a one-year fixed-rate deal at 3.95 per cent, priced at a full 0.20 per cent higher than its nearest competitor.

Not surprisingly the combination of a table-topping interest rate and the 100 per cent security of funds (courtesy of HM Treasury) regardless of balance, proved an overwhelming success until the products were withdrawn just 24 days later.

This aggressive pricing stance adopted by NS&I attracted huge swathes of funds away from the banks and building societies, with the latter seeing a total of over £2bn of balances withdrawn during October and November last year. Twelve months on, these accounts with NS&I are approaching maturity and could well be the reason for the extra activity we've witnessed in the fixed-rate bond market during the past few weeks.

Much of the focus has concentrated on the shorter term products over one and two years, with a number of providers throwing their hand in and jostling for best buy positions. The latest launch from Barnsley Building Society currently heads the one-year bond table with its new Online Bond. The account can be opened from as little as £100 and even though it is only available via the internet, at 3.05 per cent gross it is the market leader in what has become a very congested and competitive field.

There are at least seven other bonds paying 3 per cent gross fixed for one year, but the extra 0.05 per cent from Barnsley is a cute marketing move to gain that all-important best buy coverage. With new products being launched on an almost daily basis, it wouldn't surprise me to see the 3.05 per cent rate surpassed during the next couple of weeks.

Bank of Cyprus UK has also re-entered the fray after a brief absence from the savings best buys and last week stormed back to the top of the pile with both its two-year and three-year fixed-rate bonds. The two-year product is fixed at 3.60 per cent gross and the three-year option at 4.15 per cent gross – both are available from just £1 and can be opened online, by phone (0845 850 5555), by post or in branch. And for those concerned about safety of their money, deposits placed with Bank of Cyprus UK are covered by the Central Bank of Cyprus Deposit Protection Scheme, which covers €100,000 or the sterling equivalent of savers' deposits.

With rates at a low ebb, aside from ISAs, fixed rate bonds still represent the best way to obtain the highest savings returns , as long as you are comfortable that you can manage without access to your cash for the duration of the term you choose. However the difference between the best three-year deal and the best five-year fixed rate deal has recently narrowed to just 0.45 per cent and is not much of an incentive for locking your cash away for an additional two years.

Product round-up

In other savings news, Lloyds TSB has just ramped up the rate on its monthly saver account from 2 per cent to 5 per cent gross. The account is only available to existing or new Lloyds TSB current account customers and is the latest in a line of moves from banks aimed to recruit and retain current account business.

The 5 per cent rate is fixed for 12 months and you need to pay in between £25 and £250 each month. You can make unlimited penalty-free withdrawals and whilst you are limited to the amount you can deposit, 5 per cent is not to be sniffed at in the current low rate savings environment.

Mortgage lenders continue to fight hard for their share of a sluggish market, as highlighted by the latest move from ING Direct with a further cut to its two-year fixed rate, now the best buy at 2.99 per cent for loans up to 75 per cent loan to value.

The arrangement and booking fees total £945, however the overall package is priced keenly enough to tempt people off their Standard Variable Rate (SVR) with competitor lenders, particularly as this mortgage comes with free legal fees and free valuation for remortgage customers.

Mortgage activity may be subdued at the moment but it's certainly not down to a lack of low-priced products, it's more down to a lack of consumer confidence in the wider economy and the uncertainty and job security concerns associated with the spending review measures.

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