Savers offered 4% fixes


Savers offered 4% fixes

Savers willing to tie their money up can still earn more than 4 per cent on cash deposits. Banks want to lure customers into leaving their money untouched, but advisers are not convinced that this is the right time to fix.
Savers left out in the cold as rates plummet - Feb-06Fee-based current accounts raise charges and cut rates - Feb-06Savings rates tumble - Feb-04Supermutual to pay rewards - Jan-24Instruments are out of tune when cash should be king - Jan-23ICICI, the Indian-owned bank, is offering savers an annual rate of 4.18 per cent if they agree to deposit their money for two years. For those with 1m to put aside, Cater Allen Private Bank, the private banking arm of Abbey, has just launched a three-year fixed-rate account paying 4.11 per cent.

And for savers seeking to use their individual savings account (Isa) allowance for 2008/09 before the April 5 deadline, Halifax is offering a guaranteed annual rate of 3.35 per cent, tax free, on amounts over 500. For higher rate taxpayers, the addition of 40 per cent tax relief means this equates to 5.56 per cent earned each year on money saved – but only if it is left for four years.

Because two-year swap rates have remained largely unchanged, in spite of falling interest rates, banks still need to attract retail deposits with good rates in order to fund their loan books.

So, in comparison with the paltry 0.5 per cent base rate, these accounts look attractive and many savers will undoubtedly be glad to open an account that cannot whittle away returns.

However, choosing to take out a fixed-term savings account means taking a bet on where interest rates are likely to move over the next few years.

“For those who believe rates will still be at 0.5 per cent in two or even four years’ time, these deals look excellent,” said Michelle Slade at financial analysts Moneyfacts.

“But my inclination is that in four years’ time interest rates will be up. Fixing for four years could mean missing out on higher future rates.”

The trade-off for earning a stable rate of interest is a loss of flexibility. Customers who take money from the Halifax Isa, for example, must provide 30 days’ notice and will lose 180 days of interest.

This may appear a better deal than those offered by easy access accounts, but inflexibility does not necessarily translate into high returns and penalties for early withdrawal can be hefty.

Locking in to other long-term products has not been without risk. Endowment mortgages sold a decade or more ago to homeowners have struggled to live up to their promise. Fewer than one in 10 endowments at Norwich Union, the UK’s largest insurer, is likely to repay the mortgage it backs.

Homeowners who signed up to a 25-year mortgage back in 2007, when Gordon Brown was championing “lifetime loans”, would now be stuck paying interest of around 6.5 per cent while the average tracker rate has fallen to 3.54 per cent.

“It’s a question of timing,” said a spokesman at Hargreaves Lansdown. “Savers who cashed in endowment policies in 1999 did very well, and homeowners who took out 25-year mortgages with flexible terms and low rates back in the mid-90s are also doing fine.”

But as the government focuses its attention on boosting long-term borrowing, Ray Boulger at mortgage broker John Charcol says he expects to see a proliferation of attractive long-term deals in the next few months.

From: Financial Times