More 'Good News-Bad News' for Savings Interest Rates

On the good news front, it appears as though a number of challenger banks looking to steal savings deposits away from the high street are currently offering some rather sweet deals. For example, The Guardian says Metro is offering an 18-month bond with the rate of 2.4%. They are also offering 2.7% on a three-year deal and 2.1% for one year.

On the bad news front are suggestions from the Bank of England that the base rate will not rise until 2017. Thus continues the seemingly endless cycle of a little hope followed by crushing disappointment. In case you missed it, the Bank of England has been hinting at a rate increase for years. Now they are completely skipping over next year and looking at the following year.

Savings Accounts and the Base Rate

At the risk of repeating ourselves, we believe it is important to explain why the base rate is so important to savings interest rates. The base rate is the amount of money the Bank of England charges banks and building societies to borrow. When those financial institutions loan money, their interest rate must be higher to cover what they pay as well as their profit. A continually low base rate makes it easier for them to loan money by offering lower interest rates themselves.

Here's the problem: the money banks use to make loans comes from two sources. The first source is the Bank of England; the second are those customers who deposit money in savings accounts. They cannot pay higher savings interest rates because the interest they are charging on their loans will not support doing do. Furthermore, most of the bigger banks and building societies have enough government money to meet all of their needs. They do not need the extra money from savings accounts.

All of this combined translates into miserable savings interest rates for average consumers. And until the base rate rises and some of the government money dries up, nothing will change. Even the challenger banks will not be able to keep up their higher-than-average interest rates forever. At some point, the fundamental principles of banking will have to be accounted for. Property is free from these sorts of influences.

Better Than Savings and Equity Investments

Property investing is the obvious choice for consumers who are tired of meagre savings interest rates but who do not have the appetite for risky equity investments. Property offers earnings that are superior to savings as well as the stability that cannot be managed by equities. It is the best of both worlds by a long way.

The best part of property investing is that you don't have to be a millionaire to get started. If you have enough money for a 25% down payment, you can finance the remaining 75% of your first purchase. But that's not all. You also do not have to purchase at retail prices. In fact, we recommend you don't. Instead, allow Fruitful Property to locate an attractive off-market property you should be able to buy 30% to 40% below retail.

The good news-bad news of savings interest rates will continue for the foreseeable future. Rather than continually taking one step forward and two steps back with savings, why not consider consistently moving forward with property?

Sources:

  1. Guardian – http://www.theguardian.com/money/2015/nov/09/savers-benefit-challenger-banks-interest-rates

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Nick Hopkinson

by Nick Hopkinson - Property Investment commentator and Fruitful founding director.

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