UK interest rate rises to 5.25% – how to get more from your savings

As expected, for the 14th consecutive time, the Bank of England raised rates another 0.25% to 5.25% in a move that will further squeeze our budgets.

These rate increases were brought in to try and tame inflation and the good news is that it’s falling, with the recent drop from 8.7% to 7.9% proving far sharper than many expected. However, it’s still way over the Bank’s 2% target and there’s still a long way to go with some still predicting another interest rate rise in September.

Have rates peaked?

At a time of rising rates, you might be tempted to hang fire in case savings deals get even better in the coming weeks. However, savings rates are set on what banks and building societies expect to happen in the future and this rate rise was likely to have been priced into savings rates. So, it’s possible that we could be seeing the peak.

In which case, given that fixed rates are at their highest level in years with the average 1-year fixed rate standing at 5.18%, it’s worth considering a fixed option if you are able to put your money away for a while.

It’s hard to take the plunge when rates look like they are creeping up, but you need to work out the point at which you’re happy to fix. You won’t be able to spot the top of the market until after it’s passed, and rates are on their way back down again. It means it’s worth considering whether you’re happy with rates as they stand at present.

If beating inflation is your main concern, the fact that it’s expected to fall to around 4.9% by the end of the year, could make competitive fixed rates look attractive. But as always there’s no guarantee when and by how much inflation will go down. If your savings rate is below the rate of inflation the spending power of your savings will reduce over time.

There’s also the question of the best possible period to fix your savings for.

Most importantly, you should be driven by your needs and how long you are able to tie your money up for as you can’t access your money until the fixed term ends.

You’re typically able to get higher rates for fixing for longer. But, right now, the market leading four and five-year rates are lower than the market leading one and two-year rates.

However, if interest rates do drop back a year or so down the line, then if you don’t need this money for four or five years, a four or five-year fixed rate could make sense though of course this is hard to predict as nothing is certain. If the forecasts are right and we do get rate cuts within the next year or two, then when shorter-term fixes mature, fixed rates on new products could be lower.

This article isn't personal advice. If you're not sure what’s right for you, seek advice.

Finding what’s right for you

You could consider a ‘portfolio’ approach – where you break the cash into chunks depending on when you will need it and the interest rates you are looking for.

If you’re in work, you should have three to six months’ worth of essential expenses in savings you can take out quickly as your emergency savings. If you’re retired, you should hold one to three years’ worth.

However, the rest of your savings can be fixed for the periods that make the most sense for your goals. This helps you get the highest possible rates today for each portion of your cash.

If you save through a cash savings platform like Active Savings, you can keep an eye on all your savings in one place – which makes managing multiple products far easier.

Through one online account you can access a range of easy access and consistently competitive fixed rate products offered by our banking partners. As your needs change, you can switch between products in a few clicks. Remember you cannot normally access money in fixed term products until they mature.

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