Why the best savings rates come from banks you haven’t heard of

Savers looking for the best interest rates will not find them at high street banks but from providers that most have not heard of.

Since a new breed of smaller, online-only providers emerged in summer 2015 with top rates, high street providers have fallen down the best-buy tables.

For example, in the fixedrate bond market, mobile-only provider Atom Bank pays the highest rates of 1.4pc and 1.6pc for one and two-year bonds.

This compares with the highest rate on the high street from Nationwide, which pays 0.65pc on its one-year bond.

New digital bank Masthaven offers top rates of 1.67pc, 1.84pc and 2.01pc on its three, four and five-year bonds.

Vanquis Bank Savings, part of the Provident Group, a FTSE 100 company, also offers competitive fixed-rate bonds, as do Paragon Bank and Zenith Bank UK, a subsidiary of a Nigerian provider.

The highest-paying easyaccess accounts are offered by slightly more familiar names.

The Post Office pays 1.01pc. Tesco Bank, National Savings & Investments, Leeds Building Society and RCI Bank all pay 1pc.

In comparison, RBS’s instant saver offers just 0.01pc on balances up to £49,999.

Tom Adams, from advice site Savings Champion, said the smaller providers needed to compete for customers’ cash to balance their books by lending out savers’ deposits to borrowers.

He said high street banks, on the other hand, were able to rely on their name and branch locations to get the customers and deposits they needed.

Traditional providers are also able to borrow cheaply using the Bank of England’s Funding for Lending Scheme, which was later replaced by the Term Funding Scheme. This allows banks to borrow straight from the Bank at a 0.25pc interest rate.

“High street banks simply haven’t had to work as hard for savers’ cash,” said Mr Adams.

He said there was no need to shy away from unfamiliar banks as long as they were covered by the Financial Services Compensation Scheme, which protects up to £75,000 of savings, or £85,000 from January 30.