Fixed vs easy access savings accounts — with rates rising should you switch now or wait?

Whether to get a fixed rate savings account or an easy access savings account is a question likely to be on the minds of millions of savers after The Bank of England today raised the base rate – which underpins most savings rates – from 2.25% to 3%, which is the biggest single rise since 1989. 

The other question is when to pounce given the possibility savings rates could keep rising. 

While this hike is terrible news for mortgage holders on variable rates or whose fix is ending shortly, if you’re lucky enough to have cash savings, then this is an opportunity to make your money work harder. 

In fact, the best savings rates and the best cash ISA rates have been creeping up for the past few months, which has provided a silver lining to the darker economic clouds above us. 

Yet timing could be crucial too. A key point is that the best returns come from fixed rate deals, meaning once your money is in it’s locked away. There is a risk you lock in too soon and rates go up considerably again but you miss out on feeling the benefit.

That being said, the worst thing you can do is nothing if you earning the paltry sub 1% rates some banks pay. 

If you’ve got £10,000 saved and it’s earning 0.1%, you’ll get a miserly £1 in interest per year.

If you move that £10,000 to an account paying 4% (of which there are many), you’ll earn £400 a year - which is not to be sniffed at. 

But before you shift your savings account or cash ISA, make sure the account you’re moving to meets your needs. For example, will you need to access it at short notice or are you happy for it to be locked away for a while for higher rewards?

Need easy access to your money? 2.5% interest is possible

Easy access accounts usually pay the poorest rate, but right now with the best savings accounts you can bag 2.5% with Saga (if you’re over 50) and Yorkshire Building Society (although you're limited to two withdrawals per year). 

If you’re looking for the best easy access cash ISA rate, check out Saga and marcus - both paying 2.5%.

In a rising rates environment there is a chance other banks will overtake these deals but the beauty of easy access is that if a better rate appears you can take your money out and get the higher return elsewhere. 

Just be sure to check the terms and conditions - some easy access accounts only allow a limited number of penalty-free withdrawals per year.

DON’T NEED EASY ACCESS? IT COULD BE WORTH WAITING TO FIX

If you don’t need access to your money in the next year, then you’ll certainly get a better rate by fixing - but be prepared to lock your savings away for anything from one to five years. If you take money out, you’ll be subject to a penalty which will wipe out any gains you make from interest.

Once your money is in there’s no going back so if rates continue to rise then you won’t benefit.

The problem is none of us know how much better fixes will get. 

The best deals pay more than 5% now but there is an argument that you could get a better return if you wait, in case interest rates keep rising whether from banks putting them up as a result of the latest base rate rise, or if more base rates rises happen. 

Yet none of us have a crystal ball to know what will happen, even if the mood music suggests they may keep rising. With that understandable constraint, it comes down to your attitude to risk as to when to fix.

Fixing now could get you more than 4% in the top one-year fixed rate account or more than 5% in a five-year account.

Eeven though banks often fail to pass on full base rate rise to savers, there is a decent chance the top rates could rise soon as it tends to take a few days or even weeks for banks to react to base rate rises.

You could even wait till after the next base rate decision on 15 December in case it hikes rates again, or even further into the future in case of further rises.

On the flip side, the risk of waiting is that in the meantime you’re earning a much lower rate than what is possible. 

I can’t tell you what to do, but hopefully being armed with this perspective can help you make your decision.

Whatever you do, don’t do nothing

There’s no right or wrong answer as to whether to fix now or wait to fix.

If you’re not sure, it’s wise to check and at least get onto the best easy access rate, even if that is while waiting to fix.

Of course, not everyone will fall neatly into the examples I have given, while you may also want to invest your money too - especially if you are looking to save for five years or more.

But for now - don’t put up with anything less than 2% in cash savings.