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There is a lot to consider if you want to get more for your money

Higher interest rates are on the way, or so the boffins in the investment markets expect. This is great news for savers,
but it presents a conundrum for those looking at whether to lock in higher interest rates by fixing their savings.

In this article we’ll help guide you through whether you should lock away your savings to get higher rates or not.

What’s happening with interest rates?

The Bank of England has been increasing the official interest rate level known as the base rate, in response to higher inflation. It has moved from 0.1% in December last year up to 1% today.

What’s more, the rate is expected to rise further still. The market expects interest rates will rise to 2.5% by this time next year, which is a big increase over the next 12 months. This isn’t guaranteed, but it’s a guide to what’s expected.

That’s great news for savers, right?

After a long time facing record-low rates on their savings, the increase in the base rate is good news for anyone who has money saved in cash.

During the pandemic lots of people managed to put away the spare money they weren’t spending on going out, holidays, commuting etc, but for most people that’s been sitting in bank accounts earning very little.

As a result of the Bank of England raising rates, we’ve already seen savings rates increase. The top easy-access savings account paid 0.71% interest before the Bank of England first increased interest rates in December, and now it’s sitting at 1.5%, according to Moneyfacts.

The flip side of this situation is that inflation has risen and is still rising, and there is no cash savings account that pays anywhere near the level of inflation.

In fact, if we compare average cash interest rates, including the expected increase, and expected inflation rates over the next year, £10,000 of savings in the average cash account today will
lose around £500 in real terms after we take inflation into account.

What if I fix my interest rate for longer?

Anyone who is willing to lock their money away for a certain period can get a higher interest rate. The longer you lock your money away, the higher the rate you can get, generally. However, it means you can’t access the money during that time.

Some accounts will let you get your money out if you forfeit some interest, but generally you should only put money in these accounts if you know you won’t need access to it during that period.

Currently you can get 2.36% interest if you fix your savings rate for a year, with Kent Reliance, while Charter Savings Bank is paying a marginally lower 2.34% – both have a minimum investment of £1,000.

If you fix for two years you can get 2.8% with Al Rayan Bank, so long as you have at least £5,000 to save, or 2.76% with Kent Reliance, with a £1,000 minimum investment. And if you’re willing to lock money up for five years you can get 2.85% with a five-year bond from Tandem Bank.

Sounds great, I’ll fix my money then…

Don’t be quite so hasty. You need to bear in mind that further increases in the Bank of England’s base rate will push up savings rates on offer, and if you’ve fixed for a certain period, you’ll miss out on that increase.

For example, if the base rate rises to 2.5% in a year’s time, that’s an increase of 1.5 percentage points from the current rate of 1%. If banks passed on all that increase to customers, you could get an extra 1.5% return on your money.

If we apply that to the current fixed-rate accounts, it means a one-year fix could rise to 3.86%. If you saved £5,000 of money that represents an extra £75 in interest over the year.

However, banks might not pass on all the increase in the base rate. It depends on competition in the market and how much banks need to attract savings deposits.

There is also the big uncertainty about whether the Bank of England will continue to raise interest rates and if so by how much. If interest rates don’t rise or don’t rise by much, then savings rates may also not increase. So, it requires some predictions and assumptions on your part when you decide whether to fix.

You could decide to park your money in the top easy-access account and wait for interest rates to rise, or you could opt for a one-year fix, on the basis that rates will be higher once that fix comes to an end.

Another option is to hedge your bets and split your money, putting half in a fixed-rate account today and half in easy-access savings.

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