Lock in a two-year savings rate now before rates tumble in August, experts warn

Banks

Savers have been urged to seize a “golden opportunity” to lock their cash away for longer before interest rates begin to fall in the coming months.

The Bank of England is edging closer to a rate cut, with the drop now expected to come in August.

When the eventual cut comes, banks and building societies will follow suit by offering lower returns to savers.

Mortgage rates have already fallen, with several big lenders launching cheaper deals this week. As a result, experts have warned those with spare cash to take advantage of the current rates and opt for fixed two-year bonds rather than one.

Savers who stash money away in the current best two-year account can expect to earn £2,657 on holdings of £25,000.

The account, offered by Close Brothers Savings, comes with a leading interest rate of 5.06pc.

A saver putting £25,000 into the leading one-year fix, 5.22pc with Union Bank of India, and then stashing that £25,000 away in another one-year fix next year at 4.5pc would earn £2,486 across the course of the two years – which is £171 less than what they’d earn from putting the sum into a sole two-year account.

Those who take the leap and squirrel money away for longer are likely to reap the rewards, as come this time next year, interest rates are forecast to be lower.

Sarah Coles, of broker Hargreaves Lansdown, said two-year accounts should be on savers’ radar.

“If you have savings you don’t need to get your hands on in an emergency, then now is a really sensible time to consider locking in a fixed rate.

“It’s a golden opportunity, coming after inflation has fallen away and yet before rate cuts have kicked in, so you can still get more than 5pc on accounts fixed for one or two years.

“The Bank of England isn’t going to be in a hurry to slash rates, but they’re likely to get progressively lower.

“By the middle of next year, they’re forecast to be 4.5pc. Then by the middle of 2026 they’re expected to hit 4pc, and savings rates are likely to fall alongside them.

“It means if you don’t need the money for two years, it’s worth considering a slightly longer fix.”

James Hyde, from analysts Moneyfacts, said “some people will be keen to grab a deal quickly and review their existing accounts.”

He also warned that savers should anticipate “significant movement in the market” when it becomes clear that the Bank Rate will change.

The Bank has held rates at a 16-year high of 5.25pc since August 2023, but experts predict a drop of 0.25 percentage points is on the cards for August should inflation not breach 2pc.

A cut, however, is not guaranteed and the Bank’s monetary policy committee could continue to err on the side of caution.

Laura Suter, of investment platform AJ Bell, said: “The path for interest rates is far from clear – rates may not have fallen by much in a year’s time or they may have been dramatically slashed, it’s almost impossible to tell.

“If you’re unsure you could split your money between a longer-term fix and a one-year fix, to hedge your bets.”

Beware of tax implications

Ms Suter warned that longer fixes increase the likelihood of breaching the personal savings allowance, which is £1,000 for a basic-rate taxpayer and £500 for a higher-rate taxpayer.

“If fixed-rate accounts pay the interest ‘at maturity’ that means all the interest is paid out at the end of the fix,” she said. “This interest is taxable if it exceeds your allowance, and if it’s all paid out in one year it may tip you over that tax-free allowance for that year.

“This is particularly key to consider if you’re opting for a long fixed-rate account as more interest will be paid out in one go. Instead you could opt for an account that pays the interest annually or monthly, but you won’t benefit from compounding on this money.”

Using the current leading one-year fixed bond of 5.22pc, a higher-rate taxpayer would start paying tax on interest if their savings pot exceeded £9,570.

Meanwhile, a basic-rate taxpayer could have £19,150 in the account before they breached their personal savings allowance.

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