Will the High Interest Savings Accounts Boom Continue?

Posted: 22 Aug 2008 | Categories: Personal Finance

You only have to walk down the high street to notice that these days the banks and Building societies are crying out for you to deposit you money with them. Only 12 months ago the best savings accounts rates offered was 6.30% AER. Now, only one year on, some providers such as Kaupthing Edge are offering 6.55% AER with no withdrawal penalties.

Why has there been a sudden increase in rates banks are paying for their savings accounts I hear you ask? Simple, its all to do with the infamous credit crunch. As soon as the effects of the credit crunch hit, banks instantly pulled back on their lending to each other. Consequently, the extortionate low levels of lending rates were now a thing of the past.

To overcome this cash shortage and to take advantage of the fact banks can now charge higher rates of interest when they lend, they have increased their savings accounts interest rates to encourage cash deposits. You have to bear in mind that banks can gear up their deposit to lend ratios by 15 times. So if a bank receives ?00,000 in cash deposits it can actually lend ?.5million. If the ?.5 million is lent at 10% APR and they are only paying savers 6.55% AER on ?00,000 then you can see there is a healthy of profit margin.

However, there could be an end in sight to the high rates of interest currently offered, as bank are beginning to lend to each other again at lower and lower rates. The London Inter Bank Offered Rate (LIBOR) is the level at which banks are lending to each other. This has been falling, and when this level falls lower than the rates at which banks are paying savers this will drag down the savings rates with them.

Since LIBOR is on its way down it is only a matter of time before this takes it effect.

The advice at this moment in time is to lock in the highest rate of fixed term interest possible over the longest duration possible. The best on the market is currently ICICI Bank at 7.2% AER over 1 year or 7.0% AER over 3 years.

UK Price Comparison website - http://www.which4u.co.uk - Compare Credit Cards, Savings Accounts, Bank Accounts, Loans, Mortgages, Insurance and Gas/Electric bills to find the best UK deals - Savings accounts rates are at the highest they have been for 7 years, compare savings accounts to find the best one for you.

Sam_Gooch