Banks make mint from savings gap

With interest rates hovering around a 40-year low, savers have been hard-pressed for the past few years to find decent returns. So they could be forgiven for breathing a sigh of relief when the Bank of England's Monetary Policy Committee decided to raise interest rates on 10 June. Comments by the Bank of England governor, Mervyn King, will have led them to expect rates to rise further this year.

Unfortunately, the response from the banks and other financial services providers was in line with what both savers and borrowers have come to expect. While many raised their variable mortgage rates almost immediately, most are delaying an increase in savings rates until the beginning of July.

This has become a familiar pattern - allowing the industry to make money from the difference between the rate at which it lends to borrowers and the interest it provides savers.

There have been some exceptions, such as Marks & Spencer Money, which raised its rate for savers by 0.25 per cent from 11 June, the day after the MPC announcement. Yet some providers have still to respond to the interest rate rise in terms of savings. Halifax, for example, announced last Monday that it was increasing its standard variable rate on mortgages from 6.25 per cent to 6.5 per cent, but made no announcement about savings.

First Direct announced it was raising the rate borrowers on its Offset mortgage would pay, but is waiting until 5 July to increase the interest on its stand-alone savings products by 0.25 per cent. Some providers will wait until next week before making announcements; others may delay until next month.

Those that have decided to increase savings rates include Abbey National, which will pay 4.85 per cent gross on balances of £1 and above from 1 July on its e-Saver (internet-only) account. This is a tiered rate and includes a 0.5 per cent bonus for six months from the date the account is opened.

Capital One has increased rates on its savings accounts by 0.25 per cent, paying 4.79 per cent gross (4.9 per cent when interest in paid annually)on balances of £5,000 and above on its Tracker Plus Issue 4.

One positive note among the gloom for savers is that competition in the market has prompted banks and building societies to offer better rates on their top-paying accounts.

Joanna O'Brien, senior researcher at independent data company Moneyfacts, says the supermarkets and the internet have given rates a kick-start. 'The internet has lower costs and the problem with branch-based accounts is that they still have to pay the ongoing costs of staff and premises. Both the internet and the product launches by supermarkets have helped to make the market more competitive.'

She adds that even so, not everyone likes to do their banking online, and that some of the no-notice postal and telephone accounts pay as much as internet accounts. 'Keep an eye on what is going on and choose the account most suitable for you. Some people love the internet, while others prefer to go into a branch or use a postal service.'

Below we look at some of the factors to bear in mind when looking for a home for your savings.

Internet versus branch accounts


If you like receiving monthly statements, you may not like having to log on each time you want to check your balance. The good news for those who prefer to operate by post or telephone is that some of the best rates on no-notice accounts are available this way. For example, Scarborough building society's One Plus Saver Issue 7, operated either by post or telephone, is paying 4.95 per cent gross on balances of £1 and above. Birmingham Midshires Telephone Plus Issue 2 is paying 4.70 per cent gross on £1 or more.

Monthly versus yearly interest


Both of the above accounts pay interest on an annual basis. This may not appeal to people who are using their savings account to provide regular income. It is well worth checking when interest is paid, as you may receive a higher headline rate for annual interest. For example, Scarborough runs a One Plus Saver Issue 7 with monthly interest, which pays 4.85 per cent gross.

Introductory bonus rates


Providers often give an initial bonus for the first six months of the life of the account. This propels them to the top of the savings league tables, and helps to attract a lot of new money. However, these rates may not be sustained, so it is worth checking the details and weighing up whether you will want to move your money again at the end of the year. Don't forget that you will lose a couple of week's interest every time you switch providers. All of the monthly interest and no-notice accounts that make the top of Moneyfacts' current best-buy tables include an introductory bonus.

Regular savings accounts and notice periods


Putting away a sum of money each month can help with the discipline of saving - but it can also tie you into an account with a notice period that doesn't offer the best rates. Some accounts allow only one withdrawal a year, or charge a penalty if you want quick access to your money. You must also be sure you won't need your cash in a hurry if you are planning to put it in a notice account. The Universal building society's notice account is a Tracker Two account paying 5.25 per cent gross on sums of £100 and above. Interest is paid yearly, but you are tied in to 120 days' notice.

More providers are likely to announce changes over the coming weeks, so the best advice is to keep an eye on rates and compare your bank or building society with the market-leading accounts.

www.moneyfacts.co.uk