Inflation falls but savers struggle to get inflation-beating rates
This week’s announcement that inflation has fallen to 1.5% will be welcomed by savers looking for inflation-beating rates, but last month’s base rate cuts and the continued impact of the Coronavirus pandemic on the UK economy means that savers will still struggle to get rates able to beat inflation.
The Consumer Price Index (CPI) rate fell from 1.7% in February to 1.5% during March, which has resulted in an increase in the number of savings accounts now able to beat inflation, up from 26 in February to 65 today.
In fact, our research found that only four notice accounts, five fixed rate ISAs and 71 fixed rate bonds can now match or beat inflation. Within that, four notice accounts, four fixed rate ISAs and 57 fixed bonds pay more than 1.5%.
While it is positive to see that more savings accounts are able to match or beat inflation compared to last month, comparing this to a year ago, when 162 deals could beat the inflation rate of 1.9%, it shows the impact the Coronavirus pandemic and base rate cuts have had on the savings market.
Commenting on the current savings market, Rachel Springall, finance expert at Moneyfacts.co.uk, said: “Savers may well be keeping their cash close to hand right now, so convenience could be taking over any ambitions to get an inflation-beating return.
“If savers are hoping to secure an attractive rate, then applying quickly has never been so crucial. Savers must also review any accounts they currently have and switch if they are on a poor rate.”
Product Spotlight: Five-year fixed rate ISAs
Got a lump sum and looking for a good, long-term return? A five-year fixed rate bond could be just the thing:
• RCI Bank UK’s Fixed Term Savings Account offers an interest rate of 1.90% AER paid on the anniversary of opening. A minimum deposit of £1,000 is required and customers should note that while withdrawals are not permitted, further additions are allowed for 14 days from account opening. This account must be opened and managed online. For those seeking a regular income, there is a version of this account paying interest monthly at the slightly reduced rate of 1.88% gross.
• Vanquis Bank Savings account pays an interest rate of 1.85% on a minimum deposit of £1,000. Interest is paid on the anniversary of opening. As is commonplace with fixed rate bonds, no withdrawals or further additions are permitted after the initial deposit. This account must be opened online but can also be managed by post and by phone. For income-seekers, there is a version of this account paying interest monthly at the slightly reduced rate of 1.83% gross.
• Gatehouse Bank’s Fixed Term Deposit pays an expected profit rate of 1.85% AER on the anniversary of opening. A minimum deposit of £1,000 is required and no further additions or withdrawals are permitted. This bond must be opened and managed online. This bank operates under Islamic finance principles.
Top products – At a glance
How to save £11,000 on your mortgage
The average rate for a five-year fixed mortgage at 90% loan-to-value (LTV) in April 2015 was 4.49%. The equivalent average rate on 17 April 2020 was 2.75%. A mortgage of £200,000 over 25 years at 4.49% would have cost £66,631 in mortgage payments across the full five years. Now, the same five-year mortgage will be £11,274 cheaper over the five-year period.
There are also significant savings to be made at lower LTVs too – the average rate of a 75% LTV mortgage in April 2015 was 3.11%, last Friday it was 2.26%. A £200,000 mortgage over a 20-year term would save £5,019 in lower mortgage payments.
All the average rates for five-year fixed mortgages of any LTV band have reduced from April 2015 compared to April 2020. The greatest change has been for 90% LTV mortgages with a reduction of 1.74%, from 4.49% to 2.75%. The smallest reduction is for 70% LTVs, reducing from 3.09% to 2.61%.
Those with tracker mortgages may see a slightly different picture, with reduced availability of products and fewer reductions in comparative average rates. The biggest average rate reduction for two-year tracker mortgages is 0.28% at 75% LTV, while 90% LTV tracker mortgages have increased in average rate from 2.10% to 2.16%. Those borrowers wanting to take another two-year tracker at 75% LTV with a 20-year term, will see a modest saving of £1,568 over the two-year duration of the deal.
Product Spotlight: Two-year fixed rate remortgages
If your current mortgage deal is coming to an end, now may be a good time to consider securing your payments into a two-year fixed rate mortgage.
• NatWest Int Sols tops the chart, offering a rate of 1.19% (3.3% APRC) fixed until 30 June 2022, at which point it reverts to 3.59% variable. This deal is for remortgage customers looking for a maximum 60% loan-to-value (LTV) and requires a minimum loan of £25,000, to a maximum that is determined by LTV. This mortgage charges £995 in product fees and includes the incentives of free valuation and no legal fees.
• HSBC Fixed is second, offering a rate of 1.24% (3.2% APRC) fixed until 30 June 2022, which then reverts to 3.54% variable, and is available at a maximum 60% LTV for all borrower types. This deal requires a minimum loan of £10,000, up to a maximum of £5 million. It charges £999 in product fees and includes the incentives of free valuation, and no legal fees for remortgagers.
• Lloyds Bank is offering a rate of 1.24% (3.2% APRC) fixed until 31 August 2022, when it reverts to a rate of 3.59% variable. This deal is suitable for remortgagers looking for a maximum 60% LTV and is available for loans between £100,000 and £249,999. This mortgage charges £999 in product fees and includes the incentives of free valuation and no legal fees. Overpayments and payment holidays are also permitted.
Equity release products drop 15% due to pandemic
Equity release lenders have responded to the Coronavirus crisis by withdrawing or making changes to their lifetime mortgages, such as lowering the maximum loan-to-value accepted, reducing maximum loan amounts and increasing interest rates. Between April 1 and April 20, the number of equity release products declined by 15%, according to data from Moneyfacts.co.uk. These have reduced from 426 to 360, a rate of three products being withdrawn each day of the month so far.
Valuations have also been restricted due to social distancing. Many lenders are now using automated valuations or desktop valuations where possible, although borrowers may find their valuations are lower than before the crisis as surveyors and lenders are more cautious due to the current climate.
Research from the Equity Release Council (ERC) shows older homeowners aged 55 plus were struggling to add to their pension pots due to increases in the cost of living, the need to pay their mortgage, supporting their dependents and reductions in income. The research also identified this group wanted an annual retirement income of £35,196, compared to the average retirement income today of £17,212. One in six who have not yet retired expect to drawdown from their pension to make up this gap, while only one in five older homeowners who have sought information or advice about their finances in later life were prompted to consider releasing equity from their property. This could leave many retirees in the future cash-strapped but asset-rich. The ERC found that the amount that the average homeowner in England and Wales could release, in cash, from their property is £88,290.
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