Why savings rates may be heading for zero – and what to do
Could the UK’s savings rates be heading towards the zero mark?
As the Brexit chaos continued to unfold at Westminster, some of Britain’s leading savings providers were busy cutting their interest rates, dealing a fresh blow to millions of people.
On Monday, state-backed National Savings and Investments (NS&I) axed some of its most popular products and slashed interest rates for loyal customers.
Lloyds Bank told customers this week that its Instant Cash Isa rate will drop from 0.35% to 0.2% on Friday. Meanwhile, Marcus by Goldman Sachs, the online banking brand that launched with a splash a year ago, trimmed the headline rate on its once market-leading “easy access” account from 1.5% to 1.45%.
These will not be the last savings rate cuts we see over the coming weeks. For one thing, the money market rates that dictate the pricing of many savings products slumped to record lows this week.
The crucial interest rate on 10-year gilts (government bonds) – which dictates the interest rate on many mortgage and savings accounts – fell below 0.5%.
On top of that, news that the UK may be moving closer to a “Brexit recession” bolstered expectations that the Bank of England will cut interest rates this year – perhaps by as much as 0.5%.
That would be great news for borrowers, but terrible for savers at a time when many older people appear to be using easily accessible savings accounts as a “safe haven” for pension cash.
If and when there is a Bank rate cut, much or all of it is likely to be passed on to savers. But with the average easy access rate at 0.64%, and some accounts such as HSBC’s Flexible Saver paying just 0.15%, there is not much left to cut.
And perhaps we cannot completely rule out the possibility of interest rates going negative for savers in the UK, as they have done in European countries including Switzerland and Denmark, where some banks are now charging wealthy individuals for looking after their cash instead of paying interest.
Andrew Hagger at the financial website MoneyComms says: “It’s not looking good for savers at the moment.” Asked whether savings rates could potentially head towards zero, he says: “Potentially on some instant-access accounts, that could happen. If the base rate was cut, in some instances we could be heading towards zero or pretty close.”
The move by NS&I is especially notable because as well as being one of the UK’s biggest savings providers, it is also a government department.
NS&I has withdrawn its one-year and three-year guaranteed growth bonds and guaranteed income bonds from sale, and has cut the rate by 0.25% for anyone rolling over an existing guaranteed growth bond, guaranteed income bond or fixed-interest savings certificate. The new rates range between 1.2% and 2%.
When we invest in NS&I products, we are lending money to the government, and in return it pays us interest (or prizes for premium bond holders). But there is a big problem for savers: it is now cheaper for the government to raise cash on the money markets instead, which it does by issuing bonds.
Sarah Coles of the investment firm Hargreaves Lansdown says: “At the moment, the enormous uncertainty in the market means investors want bonds and are willing to accept low yields in return.”
Meanwhile, the latest data from Moneyfacts shows that across the market, average fixed savings rates have been steadily falling. It said the average rate on a five-year fixed rate savings bond, assuming a £10,000 investment, stood at 1.94% on Wednesday.
That is down from 1.95% last Sunday, 2.01% at the start of August, and 2.08% on 1 July. It is a similar story over shorter terms: the average rate on a one-year fixed rate bond was 1.35% this week, but stood at 1.44% at the start of July.
Rates might be falling, but Ray Boulger at the mortgage broker John Charcol – who tracks gilt yields – says that if you are a saver who has some money you don’t need right now, there is an argument for locking it up for a year or two on the basis that over the next few months, rates are more likely to fall than go up.
So what can you do?
• Take advantage of the deals still out there. At 1.45%, the Marcus interest rate is still decent. Meanwhile, Shawbrook Bank has an easy-access account paying 1.48%. In terms of fixed-rate bonds, Bank of London and the Middle East tops the Moneyfacts tables – it is paying 2.1% over one year and 2.45% over three years (these are expected rates). Aldermore and Paragon are both paying 2.25% over five years.
• Make use of the savings accounts that come with a 25% government bonus. These are the lifetime Isa and the help-to-buy Isa. Paltry interest rates are less important if you are getting hundreds or thousands of pounds of free cash.
• Consider an offset mortgage. If you have a mortgage, plus a decent amount in savings that you want to hang on to but is probably earning very little interest, it may be worth considering an offset home loan, says Boulger. These mortgages link your savings to your home loan, so your savings balance is used to reduce – or offset – the interest you pay on your mortgage.
• Keep it in the family. Ultra-low interest rates may mean more loans and handouts from the Bank of Mum and Dad. “The lower the return you are getting on your savings, the more value there is in helping out a child or grandchild with a deposit,” says Boulger.