Now bond rates take a battering

SAVERS looking to renew their one-year fixed-rate bonds could see their interest rates drop by a third, Money Mail research reveals.

Rates have already tumbled this year, and are set to fall further if the Bank of England cuts interest rates from 0.75 pc to 0.5 pc next week. Experts say the decision could go either way as the economy is slowing.

A fierce price war in the mortgage market, awash with cash as demand falls, led to rockbottom levels of an average 1.87 pc on new loans in November, according to the latest Bank of England figures. To maintain profits, lenders have cut rates to savers.

With inflation at 1.3 pc, below the government target of 2 pc, a cut in the base rate is possible later this year, if not next week. Rachel Thrussell, from analysts Moneyfacts, says: ‘Last year brought bad news for savers, and this year will be no better. We are likely to see more rate cuts.’

Savers in search of better returns turned to fixed-rate bonds at the start of last year, after they fell out of favour in 2018. A year ago they could find rates of around 2 pc or more if they tied up their money for a year. But now the best deal is 1.66 pc — a 17 pc drop. Only Smartsave Bank pays this, with Atom Bank close behind at 1.65 pc.

With big banks, savers could face even bigger cuts. The NatWest one-year fixed-rate bond, which matured this month, paid 1 pc. The bank is currently offering 0.65 pc — a 35 pc drop. Barclays also pays 0.65 pc fixed for a year, while Santander pays 0.4 pc. halifax and Lloyds do not offer a one-year bond — and they only pay a miserly 0.75 pc if you tie up your money for two years.

On two-year bonds, top rates have fallen by 22 pc, from 2.25 pc a year ago to 1.75 pc at best from Atom or Masthaven Bank.

The return is also down 15 pc on the top 2.05 pc available two years ago, despite the general level of rates rising from 0.5 pc to 0.75 pc over the past two years.

Savers now need to tie their money up for five years to earn anywhere near their old 2 pc one-year rate. But Patrick Connolly, of independent advisers Chase de Vere, says: ‘You need to ask yourself if you are getting rewarded for tying your money up for longer. The answer is no, so it is a good idea to keep it as flexible as you can.’

You benefit from just £34 extra interest a year on each £10,000 at 2 pc for five years, against 1.66 pc for one year. With the best two-year bond from Atom or Masthaven at 1.75 pc, you will see just £9 extra.