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What to beware with high-interest savings accounts

What to beware with high-interest savings accounts
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After remaining at record lows for much of last year due to the coronavirus pandemic, interest rates on savings accounts have received a boost in recent weeks. This is due to banks needing an infusion of cash to meet the significant number of new mortgage applications. However, experts warn that the new high-interest savings account offers might only be temporary. Savers will need to act quickly if they want to benefit.

Here’s what you need to know.

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What has been happening to interest rates on savings accounts?

Interest rates on savings have been low since the 2008 financial crisis. The coronavirus pandemic has made things even worse.

The Bank of England (BoE) cutting the base rate to an all-time low of 0.1% to support spending has resulted in savings rates plummeting further.

However, over the last few weeks, the situation has improved. For example, at the start of the new tax year, the best one-year fixed-rate savings account on the market offered 0.65% interest. Savers can now get up to 0.85%.

Why are we seeing more high-interest savings accounts?

Much of it has to do with the current nationwide house-buying frenzy, according to Sarah Coles, personal finance analyst at Hargreaves Lansdown.

Coles says that banks currently require more cash to fund their mortgage lending as demand rises. The banks have had to offer higher returns in order to persuade those hoarding cash and those who have put it in easy-access accounts to move it to fixed savings accounts.

Banks are also being compelled to offer higher returns in order to compete effectively with their counterparts who are in the same predicament.

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Why could high-interest savings account offers be a flash in the pan?

The high-interest savings account offers we are seeing might only be temporary according to Coles.

One reason for this is that the banks that are currently offering higher rates are not household names. They are smaller institutions with limited capacity, and their products might not be available for long.

In addition, Coles reckons that the house buying boom that has resulted in interest rates going up might burn itself out in the summer.

The extension of the stamp duty holiday has encouraged more buyers than sellers. As a result, there is currently a supply and demand imbalance that is driving house prices up.  

Coles believes that the end of the stamp duty holiday in June will rebalance the market and significantly cool it. This could lead to a fall in mortgage requests, which means that banks will no longer need higher savings reserves.

Consequently, savers must act fast if they want to lock in better rates.

Cole explains, “If you’re looking for a new home for your money, particularly if you want to tie it up in return for a better rate, it’s well worth acting sooner rather than later while the best deals are around.”

On a broader scale, the situation is also not looking favourable for savers. The BoE is unlikely to raise the base rate until inflation is consistently at or above the 2% target. As a result, we are not likely to see any market-wide interest rates rises any time soon.

Could savers get better returns elsewhere?

With savings rates at historic lows and high-interest savings account offers likely to be short-lived, UK savers seeking better returns from their savings may want to consider other options.

One viable option is the stock market. Although past performance is not a reliable indicator of future returns, over the long term, the stock market has historically produced positive returns for investors and helped them build wealth.

The value of returns is particularly enhanced when you invest through a tax-efficient vehicle such as a stocks and shares ISA. This is essentially a tax-free wrapper that shields any income and increase in the value of your investment from tax.

Keep in mind, however, that tax rules can change and that tax treatment will depend on your individual circumstances.

It’s also important to note that investing in the stock market is inherently risky. Make sure you have done your homework before you part with your money.

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