Savings

Should you wait for savings rates to rise or lock in your money now?

Should you wait for savings rates to rise or lock in your money? Here’s why ‘FOMO’ from future higher rates could hurt your returns

  • The best one-year contract pays 3.35% while the best two-year contract pays 3.51%
  • Temptation to “wait” for further rate hikes can negatively impact returns

Over the past six months, fixed rate savings offers have grown every week with new best buys launched left, right and center.

The current best one-year offer earns 3.35%, while the best two-year offer earns 3.51%.

Unlike easy-to-access savings offers, fixed rates require savers to give up access to their money for the fixed-term period.

This means that once a saver has committed to a fixed agreement, they can no longer change their mind and transfer money to another account without penalty.

Fix or tweak: Savers might wait for more rate hikes, but is that wise?

While many expect interest rates to continue to rise in the near term, it is thought this could prompt some savers to play a waiting game in a case of ‘FOMO’ – the fear of running out. Something.

However, the temptation to “wait” for further rate hikes can have a negative impact on savers’ returns.

For example, if someone held £10,000 for six months in the current highest paying easy access account paying 2.1% and then fixed, they would need the fixed deal to pay almost 4.6% during for the next six months to replicate the interest they would have earned in 12 months by opting for the best offer of 3.35% now.

This suggests that for the indecision to bear fruit, very large interest rate hikes are needed.

The delay will be even more devastating for savers whose money languishes in accounts paying 0.1% or less.

According to analysis by Paragon Bank, around a quarter of UK savings could sink into accounts paying such miniscule returns.

Someone who waits for fixed rates to rise and chooses to hold £10,000 for six months in an easy-to-access account paying 0.1% will only earn £5 in interest over that period.

If they correct then, they would need the fixed deal to pay more than 6.5% for the next six months to replicate the interest they would have earned in 12 months by opting for the better deal of 3.35% now .

BEST FIXED RATE ACCOUNTS
Account type (minimum investment) 0% tax 20% tax 40% tax
ONE YEAR
United Trust Bank (£5,000+) 3.35 2.68 2.01
18 MONTHS
United Trust Bank (£5,000+) (4) 3.40 2.72 2.04
TWO YEARS
SmartSave Bank (£10,000+) 3.51 2.81 2.11
THREE YEARS
Secure Trusted Bank (£1,000) 3.55 2.84 2.13
FIVE YEARS
SmartSave Bank (£10,000+) 3.61 2.89 2.17

Kevin Mountford, co-founder of Raisin UK, said: “It’s not worth the wait when it comes to saving. Even if interest rates continue to rise, consumers should act now. .

“Every day, there are still millions of people sitting in low or interest-free accounts, like checking accounts, where inflation hits hard and money loses its value.

“If it’s clear that savings won’t be needed in the next 12 months, it’s almost always more lucrative to invest them directly.

“Of course, those who have doubts about this, in the context of rising energy costs, are playing the right card with an easy-to-access and flexible account.”

What about the staircase strategy?

The ladder strategy offers an alternative for savers who want to save their fixed-rate money while taking advantage of rising rates, according to Raisin UK.

This involves savers securing money for the long term with different maturities, thereby reducing the waiting period for higher interest rates.

For example, a £10,000 deposit is split and £2,000 each is invested at fixed interest rates with terms of one, two, three, four and five years.

After only one year, the first fixed amount, including accrued interest, is paid out and can then be invested again at the higher interest rate.

The following year, the two-year term deposit is due, and so on.

Mountford said: “With the staircase strategy, interest can be earned quickly while taking advantage of future interest rate increases.

“That means savers are taking advantage of rising interest rates without having their money sitting in checking accounts for months on end, earning no income.

“Those who need cash in the short term can make it work for them in an easy-to-access account, and for those looking for a longer-term strategy, one-year fixed-rate bonds are a great option. .”

THIS IS MONEY’S FIVE OF THE BEST SAVINGS OFFERS