Money Insider: Savers should switch to make best of rock-bottom rates
Saturday 21 August 2010
Yet another month passes and there's still no light at the end of the tunnel for savers who continue to suffer at the hands of rock-bottom interest rates and niggling inflation.
With annual inflation (CPI) down just 0.1 per cent to 3.1 per cent in July, a basic rate taxpayer needs to earn 3.875 per cent before tax to sustain the value of their savings.
Despite protestations from MP's and petitions and campaigns from consumer groups, the grim reality is that this situation isn't going to improve anytime soon. It was back in March 2009 that base rate hit 0.5 per cent and, almost 18 months on, there's no sign of it picking up, with many analysts confidently predicting no change until spring 2011 at the earliest.
So what should you do? It depends on your situation, but if you're building a savings pot by putting money aside on a weekly or monthly basis, then unless you've got some expensive credit card or overdraft debt to clear, the message is to carry on saving.
Whilst the icing on the cake – your interest – may be a little thin, at least your capital will continue to grow and when interest rates eventually pick up, you'll be in a better position to benefit. In the meantime, keep a check on interest rates and try to get the best return you can during these testing times.
If you're not in a position to add to your savings and are relying on them to supplement your income, it's still worth checking the rates on offer and switching your money to squeeze the most you can from the banks or building societies. There are hundreds of savings accounts paying less than 0.2 per cent and if your money is sitting in one of these then it's time to take some swift action and move it elsewhere as you can easily earn 10 to 15 times as much.
If you want instant access to your savings, you can get 2.80 per cent with AA savings, 2.75 per cent with Birmingham Midshires and Santander, and 2.70 per cent from Sainsbury's Finance. All of these include an introductory bonus for the first 12 months, so you'll need to switch again this time next year, but at least you're getting a "best buy" rate in the meantime. If you can lock your cash away then it's possible to earn 3.10 per cent for one year with ICICI Bank UK or 3.70 per cent for two years with Coventry Building Society.
There are even higher returns for those who are able to put their money into a five-year bond, however I appreciate that people may be concerned with having to tie their cash up until 2015. However this week we saw the launch of a new stepped rate savings bond from State Bank of India, which is likely to prove very popular due to a combination of good rates and flexibility. It pays 3.25 per cent in year one, 4 per cent in year two, 4.5 per cent in the third year, 5 per cent in the fourth and 5.75 per cent in the final year.
The big plus point with this account is that savers are able to withdraw their money in full after two years, without any penalties or loss of interest. So if the Bank of England rate rises and savings rates improve, savers are free to exit the bond after two, three or four years and switch to a better account elsewhere.
Post Office offers reduced mortgage rates
the post Office reduced rates across its mortgage range last week and launched an attractive 2.85 per cent fix for two years up to 65 per cent LTV.
Whilst the rate is excellent, the large arrangement fee of £1,495 means that, in some cases, it will prove more expensive than competitor products charging a higher rate of interest.
For example on a £150,000 advance, the 2.99 per cent fix (to 75 per cent LTV) from Yorkshire Building Society with a £495 fee works out £739.12 cheaper over the two-year term. This highlights the importance of establishing the total cost of your mortgage and not being swayed by headline interest rates. Arrangement fees can vary dramatically between providers and the shorter the term of your mortgage, the more impact these fees will have.
Away from fixed rates, HSBC this week announced that it was extending the original two-week deal for its 2.19 per cent tracker mortgage with a £99 booking fee. The lifetime tracker, currently the lowest in the market, could be withdrawn at anytime, but will definitely be gone by 5 September.
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