Savings rates soar in 2017
With savings rates up by over 40% in some product categories in 2017, the inevitable questions are being asked about whether this can continue. We’ve looked at what’s happening in the market, what’s driving it and analyse whether it can continue.
At the start of 2017, the top 1 Year Fixed Bond paid 1.40%, 2 Years was 1.60% and 5 Years briefly dipped below 2% for the first time ever. Fast forward six months and 2% can be found on 1 Year, three providers pay 2% or more on 2 Years and 2.50% can be earned on 5 Years
This isn’t a story of slowly increasing interest rates though; it’s a very recent phenomenon with most of the increases being seen in the last few weeks.
There’s several drivers for this. Firstly, there’s been a significant increase in competition. However, this isn’t driven by new entrants as, other than Ford Money, we’ve yet to see any new players enter the savings market in 2017. It’s being driven by existing players in the market becoming much more competitive.
Since the start of May, and in particular the last fortnight, we’ve seen intense competition with Kent Reliance re-entering the market after a prolonged absence, plus Shawbrook, Secure Trust, Al-Rayan, Atom and Bank of London & Middle East all coming back in strongly with competitive rates. Add to this the likes of Charter Savings, Paragon, Ikano and Hampshire Trust, who are the perennials of the best buy tables, and we have a strong mix of competition.
Secondly, it’s around lack of differentiation. Many of those banks mentioned offer great service, easy application processes, a wide mix of products and generally a strong customer proposition. Certainly, if you speak to customers of those banks, they are a breath of fresh air to deal with compared to the big 4. However, most haven’t gone beyond this and therefore are finding the main to compete amongst each other is by price.
Thirdly, demand is playing a huge factor. This isn’t demand from savers – who have been desperate for any sign of decent rates – but from borrowers. Most of these banks are niche lenders and are growing their lending strongly in areas where the big 4 either no longer operate or never did have an offering. To continue to do this, they need savers monies. All signs are that lending amongst these banks is still very successful.
So, the big question for savers is ‘can it continue?’ Competition is likely to increase in the second half of the year with Amicus, Civilised and Private & Commercial Finance Group expected to enter the market in H2. There are few signs of any innovation from those in the market so price is likely to be a key differentiator. So, there’s some good reasons to support continued strengthening of savings rates.
The key questions are can the lending growth continue and what is the appetite for savings balances from those fighting at the top of the tables? On lending growth, there are signs that this is slowing, albeit with many players still doing double digit increases on previous years. The main drag is that the combined balance sheets of those in our best buy tables is less than £50bn in a market worth £1.5tr. Given this, there will be a limit to how much further rates are likely to go.
In conclusion, we expect competition to continue to drive rates and there are good signs that this will continue. However, the size of the balance sheets of those banks looking to raise savings balances is not great enough to materially drive the market forward. Therefore, we expect the current strong market can be sustained but are not optimistic that substantial moves upwards can be continued.