Over the last few years, thanks to the efforts of my journalist colleagues, people have become increasingly aware of ‘the loyalty charge’.
The loyalty charge hit the headlines as a result of insurance companies hiking the price of premiums each year for their loyal customers, without any particular reason for doing so. In some instances, people were paying over £1,000 more than their neighbours for what are effectively the same policies. This is, of course, morally wrong, not that that ever stops businesses.
The insurance loyalty charge has been banned now – but only for car and home insurance policies. However, in many other sectors, like broadband or membership services, you will pay a lot more for staying put.
Of course, you can also lose out big time when businesses like banks fail to pass on benefits to you that by rights you should have. And the one that drives me the maddest is the failure of banks to pass on decent savings rates to their loyal customers.
What’s happening with bank saving rates?
The big high-street banks know that many of their customers are reluctant to jump ship to a competitor. This means they all tend to mirror each other in the rates they offer to their savers – and on standard bank accounts.
The Bank of England raised the base rate to a decade long high of 4.5% last week. Because this is the rate that mortgages are based on, along with savings accounts and other interest rates, this should – in theory – be mirrored in the rates we receive. The theory is that a competitive bank should offer us a great rate for savings accounts, especially if they are also raising the rate, it charges you for borrowing money, from loans to mortgages.
It won’t surprise more cynical readers to learn that this rarely happens.
What really grinds my gears about the behaviour of the big banks is how they are willing to take much more from borrowers while giving so little back to savers. The fact that this is so blatant is shocking.
As the Times reported on Sunday the big five banks are offering an average savings rates that still trails by the base rate by 1%. Meanwhile, the mortgage standard variable rate (SVR) is 7.49% today. Quite the discrepancy.
Frankly, I think this is outrageous. The question I am asked most by readers is “Can they get away with this” Sadly, the answer is yes. The banks are not breaking regulations or legislation by not being competitive. Though I think it’s high time that they were forced to offer a rate at least approaching the Bank of England base rate if they want to raise interest rates for mortgages and lending. It’s not fair that they can give so little and take so much at the same time.
One question that crops up is why some banks tell you about interest rate changes and others don’t. The rules around this are complex – knock yourself out here if you want to know more! In short, a bank or building society should tell you about any ‘material’ changes – though they’ve always had a range of ways to do this. In the past, that usually meant a rather busy poster in the local branch or a newspaper advert. These options are a bit rarer now – don’t get me started on branch closures! So though your bank should tell you, the change might be buried in an email. A simple solution to this would be to send a text with the information on it.
Getting great rates and avoiding the traps
Given that the major high street banks and building societies aren’t likely to give us the best savings rates at the moment, then what should you do if you want a better deal?
Casting your eyes over the banking interest rates is rather complicated. That’s because you’ll be offered different rates for standard accounts, (easy access) savings accounts, notice accounts and special offers too.
The rule of thumb is there are some good deals out there, but you need to have a think about how long you are willing to ‘lock your money in’ to get the best rates.
If you want to go for easy access savings then some of the new online only, ‘challenger’ banks have some good deals, though nothing earth-shaking. The best rate I can find today is 3.71% which isn’t jaw-dropping. That’s still better than the main high street banks though, so worth considering if you have a chunk of money in a standard savings account that isn’t doing anything.
Okay, let’s talk about caveats and catches. Some of the bigger lenders have some deals that look great on paper, but when you go in to the detail, they are less than impressive. The main catches to watch out for are:
- Loyalty deals. These are better rates… but ones only available to existing customers of the bank or building society.
- Minimum payments. Some accounts require you to have a minimum amount of money paid in to the account each month, or even your wages.
- Limited withdrawals. Even though some accounts are billed as ‘easy access’ savings accounts, you may find that you are limited to only a small number of withdrawals each year.
- Bonus rates. Watch out for these. A bonus rate looks good on paper but that rate will change after a set period, which means the interest you are paid will drop significantly.
- Variable rates. As the name on the box says, these rates will go up and down over time. We’re expecting the BoE base rate to drop later this year, so these rates will go down.
If you are prepared to save some of your money and leave it untouched for a while, then notice accounts are the way to go. There’s a huge range of rates out there, depending on how long you are willing to lock in your cash, but above all else, find out what happens if you do need to access your cash in an emergency.
Ditch a lacklustre relationship today!
I want people reading this article to get angry enough that they get motivated and switch their savings to a better deal today. The good news is most current and easy access savings accounts can be switched relatively easily.
I spoke to Pay UK, the operator and standards body for interbank payment systems, who confirmed in the past 12 months (1 April 2022 to 31 March 2023), there were 1,131,067 switches. That’s up from 986,959 switches the year before. This is a major improvement, but millions of people are still missing out on better interest rates.
The process of switching accounts is actually far easier than you might think. When you open a new account, you choose a date to switch then your new bank takes care of the rest, including transferring over all of your regular payments. Any payments that go to the old account after this should be redirected too. The Current Account Switching Service (CASS) guarantees that you’ll be refunded by your new bank if you incur charges or missed interest due to errors. The whole process should take just seven days too. This applies to current and most savings accounts, though bear in mind notice accounts and specific savings accounts may take longer.
Banks based in the UK must be regulated by the Financial Conduct Authority (FCA), which means you can go to the Financial Ombudsman Service (FOS) if things go wrong. As I mentioned in my recent Times Money Mentor column, you can also go to the Financial Services Compensation Scheme (FSCS) if the bank collapses, protecting you for up to £85,000 per person, per bank. But make sure you check that the new bank is UK regulated.
So set aside some time in your diary today to do a bit of research and find the best deal. Give yourself 30 minutes to do some research then take a day or two to think about it. Then switch to a better deal.
Featured in Times Money Mentor – Martyn James https://www.thetimes.co.uk/money-mentor/article/best-savings-rates-interest-uk-banks/