In his latest comment article, Paragon Bank Savings Director Derek Sprawling outlines why he believes the trend toward fixed-rate savings is set to continue.

September 23 2022 may seem like an innocuous date but it’s one that had wide ramifications for the nation’s savers. On a sunny Friday afternoon, the then Chancellor Kwasi Kwarteng stepped up to the floor of the House of Commons to deliver his now infamous ‘mini budget’.

The aftermath sent the financial markets into a spin and put paid to the Ministerial careers of Kwasi and, ultimately, the Prime Minister Liz Truss. Swap rates, which underpin mortgage and savings rates, soared as the financial markets forecast that the Bank of England would have to raise Base Rate more aggressively to curb inflation.

For mortgage borrowers, that spelled some pain in the pocket, but savers have benefitted from the fallout of that fateful day. It heralded the start of the great ‘switch to fix’ trend as proactive savers moved cash out of instant access or current accounts and into fixed-term products.

Switch activity

Savers recorded the highest level of switching activity on record during the fourth quarter of 2022 as they responded to rising rates.

Paragon’s analysis of CACI data, which compiles the savings statistics from most of the country’s leading providers, showed that savers placed £73.5 billion into new savings accounts during the final three months of last year. The figure was nearly as much as the £78.7 billion placed during the whole of 2021 and a 316% increase on the £17.6 billion recorded in the corresponding period in 2021.

Much of that money went into fixed-rate accounts, with one-year variants the most popular choice. Data from the Bank of England shows that since September last year, the amount of money held in Term Deposits has increased by £77 billion (from £146 billion to £223 billion). Conversely, money held in interest-bearing ‘Sight Deposits’, the Bank’s term for easy access accounts, has fallen by £91 billion (from £971 billion to £880 billion).

Based on more detailed CACI data, which compiles the savings statistics from most of the country’s leading providers, the trend towards fixed-rate accounts shows no signs of slowing down. According to the company’s statistics, the net flow of money into fixed-rate ISAs has been approximately £1 billion per week since the end of April, with a similar figure flowing into non-ISA fixed-rate variants.

The spike in new accounts opened post the mini-budget means that savers who took out one-year options are coming up to maturity and the positive news for them is that they are emerging into a higher rate environment.

The average savings rate for a one-year non-ISA fixed-rate account was 2.94% at the start of October 2022; today it’s 5.44%. Looking at five-year rates paints a similar picture – increasing from 3.46% to 5.08%. For ISA variants, the one-year increase looks like 2.29% to 5.21%. 

There are several reasons why I believe fixed-rate savings accounts will continue to be popular. The first is that there are still billions of pounds earning poor rates of return, or nothing at all.

Zero interest

An amazing £244 billion is held in current accounts earning no interest at all according to the Bank of England – that’s larger than the size of the non-ISA fixed-term market. Meanwhile, CACI’s figures show that a quarter of balances in instant access accounts are still earning 1% or less, despite the rising interest rate environment of the past 12 months.

There is a better home for that cash and many consumers have woken up to the benefits of switching their cash since September last year.

Secondly, fixed-rate balances tend to renew as savers choose to opt for a guaranteed return– once a saver opts for a fixed-rate, they typically move their money into another fixed-term product at maturity.

The rising rate environment of the past year has woken up savers to the benefits of moving their money, plus higher absolute rates over the coming years will continue to incentivise opting for a fixed-term product.

The key going forward will be waking up the inert savers so they too are benefiting.

View Paragon’s range of Savings Accounts.