One-year fixed rates will soon reach 5%

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Markets are pricing in savings rates that will soon reach 5% on one-year fixed rate bonds. Is this the peak and should you lock up your money?

Savings rates have been rising inexorably since the beginning of the year, and especially in the last month.

The currently best-priced one-year fixed-rate bond is offered by Charter Savings Bank, paying 4.31% AER (minimum £5,000).

But according to Hargreaves Lansdown, he said swap rates indicate one-year fixed rates could hit 5% before long. However, there are ways to earn 5% interest without tying up your money for years.

Tom Higham, acting head of savings at Hargreaves Lansdown, explained that looking at the interest rate swap market gives “an indication of the truer prices of silver at different terms”.

He said: “Banks use these markets to manage interest rate risk by changing their exposure between floating and fixed rates, much like how individuals might use fixed rate mortgage agreements to lock in a rate . Right now, the market price for 12-month swaps is close to 5%. That’s up from 3.5% at the end of August.

However, he said for savers, it “will not happen overnight”.

Indeed, “no bank wants to pay more than necessary to attract new deposits, so it increases little by little, in turn, pushes ever so slightly forward to attract more deposits”.

He added that they were also holding back due to the demand for loans.

Higham said: “As rates rise, people will be less inclined to borrow at a higher rate, so they won’t need to raise as many deposits to fund the loan.”

Have rates peaked and should you correct now?

Given the recent rate hikes, some people will hold back as the market is expected to rise further.

According to Hargreaves Lansdown research, the majority of savings are held in easy-to-access accounts.

While this is the right place for an emergency fund of three to six months of essential expenses, senior personal finance analyst Sarah Coles says that once you’ve got more than that, “it’s at least worth the worth considering locking up some of the money in return for a higher interest rate”.

However, she said it’s not always an easy decision to make.

“When we surveyed people in April, half of those who had opted for easy-access savings said they wanted to keep all their money close at hand just in case, while more than a quarter said they used easy access because they felt more comfortable. In a context of high inflation, energy crisis and political uncertainty, it is not surprising that savers are nervous. We must therefore promise a massive increase in our savings rates for a correction to be worthwhile. On average, people said they would need 4-5% more interest to consider fixing. »

As rates approach that number, Coles said waiting for a better fixed rate “is a perfectly reasonable approach,” as long as you answer two questions.

“When will you think rates have risen enough to make it worth correcting? And where will your money be in the meantime?

“It’s notoriously difficult to spot when rates have peaked, until they have. So if you hang on until it’s obvious, you’ve waited too long. Instead, it’s worth making a decision about what interest rate you’d be happy to charge.

“If it takes months for rates to hit that level and your money languishes in an account paying a fraction of 1%, you’ll lose a lot more buying power than you need. It’s worth considering switching to an easy access competitive account – where you can currently earn up to 2.5% – until you’re ready to fix it,” she said.

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