NS&I one-year fixed rate savings accounts pays dividends for bank

Commenting, Myron Jobson, Senior Personal Finance Analyst, interactive investor, says: “The figures show that the NS&I dominated the savings market last month, with £7.7 billion moving into the Treasury-backed bank, while £700 million was withdrawn from banks and building societies savings accounts.

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“The NS&I recent hikes in savings rates have paid off in a big way for the government-backed institution, with the uptick in its one-year fixed rate accounts at the end of August proving to be the cream of the crop.

“The sheer number of people who subscribed to the accounts is unheard of, and is undoubtedly the key reason behind the sharp rise in cash moving into the NS&I last month - the highest since August 2020 at the height of the 'accidental savers' phenomenon during the Covid-19 pandemic. The NS&I became a victim of its own success and ultimately pulled the market-leading one year fixed-rate savings deals from market at the start of October. The move could be seen as an indication that the clock is ticking for savers to cash in on high interest rates. The prevailing sentiment among economists is that interest rates are close to their peak. If this is the case, the best deals will not be around long.

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“Those who can afford to put money away for five years or more should consider investing for the potential of inflation-beating returns that far outstrip savings rates. Investing can be volatile on a day-to-day basis and while the potential for greater returns from the stock market comes with inevitable risk, taking a long-term view means you can smooth out some of those highs and lows while benefiting from the long-term potential that comes with this approach. But everyone needs a low-risk buffer too.”

Why invest when savings rates are high?

Cash is certainly back. There is no denying the allure of cash following a significant uptick in savings rates, but over the long term, it is costly to ignore the stock market.

“There isn’t a binary answer in the savings vs investing debate. The answer is that you should be doing both if you have the means to do so – whatever your goals and attitude to risk.

“Savings rates are attractive, with the top easy-access deals offering a rate of interest north of 5%. But it is unhelpful to view savings rates and investment returns in the same way because it creates an expectation of having a steady annual return when the reality is you could see a double-digit return in one year and a loss the next. The key is to give your money ample time in the market to smooth out the effects of weekly market ups and downs. And don’t forget that cash rates fluctuate too – there’s no telling if a good rate now will still be there in the future.

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“While past performance is not an indicator of future results, a look back at history shows that investing is king over the long term. As we move into a more uncertain market environment, it makes sense for cautious investors - or someone approaching retirement - to focus on capital preservation and limit volatility by maintaining a reasonable cash buffer within a well-diversified portfolio. For those who can afford to keep their money tied up in investments for at least five years and are happy to tolerate inevitable stock market volatility, it is smart to keep money invested.

“Cash savings is the way to go for short-term savings goals – generally those less than five years away. It is also important to maintain a healthy rainy-day fund – three to six months’ salary worth is a good rule of thumb.”

Mortgages

“Despite falls in house prices and mortgage rates, the affordability sweet spot remains elusive for many buyers. The recent fall in mortgage rates, while welcomed by prospective buyers, hasn’t moved the dial enough for many to participate in the housing market. The continued housing shortage makes market conditions even more challenging, as limited inventory means fewer options.

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“But there are green shoots of hope for would-be buyers. Wage growth now outpaces inflation, while home prices and mortgages rates are tipped to wane further. Over time, that combination should improve affordability for potential buyers – but there are no guarantees.

“While prices and rates are expected to wane further, trying to pinpoint the exact moment to buy is akin to predicting the weather – it requires a deep understanding of local and macroeconomics indicators, which is no small feat.”