July 22, 2011 4:41 pm

Top one-year savings bonds come from smaller providers

Building societies and niche providers are leading the field for savings accounts, topping the market for one, two, three, four and five year bonds.

Mutuals such as Norwich & Peterborough Building Society and small deposit takers such as Aldermore have overtaken high street banks with new offers.

Four of the highest-paying seven one-year bonds on offer now come from building societies. None are provided by high street banks.

Over a year ago the picture was rather different, with large international banks such as ICICI Bank, State Bank of India and Lloyds Banking Group (through its Birmingham Midshires arm) dominating the market.

But mutuals and small providers that are still unable to access funds via the money markets have instead turned to savers, hoping to attract sufficient deposits to start lending out money to potential homebuyers.

Norwich & Peterborough recently released a one-year bond paying 3.65 per cent, the best one-year fixed rate that has been available to savers for nearly a year and a half.

“It seems that niche players who can’t access funds in the normal way but still have a demand for borrowing from customers are topping the savings market in order to fund that lending,” said Andrew Hagger of Moneynet, which compiled the research.

The simple structure used by mutuals means that if they cannot attract sufficient funding from savers, they will not be able to lend to borrowers.

“The wholesale market has opened up a bit, but not for all providers,” said David Black at Defaqto. “That’s why the larger banks and building societies are doing the bulk of mortgage lending now.”

However, he noted that the market has changed continuously over the past year, with high street banks occasionally entering the best buy tables with limited offers in order to pull in specific sums of money for particular financing plans.

“A lot of people aren’t saving at the moment; they are using that money to pay bills, so in order to attract funds providers have to do something dramatic and offer a market beating rate, but limit that rate to a short period of time,” said Black.

“Small margins can make a big difference in the amount of money they can attract and the free publicity that best buy tables provide.”

Overall, the short term savings market has become far more competitive recently, with rates increasing in spite of a lack of movement on the Bank of England’s base interest rate of 0.5 per cent.

The difference between interest earned in a four-year fixed-rate bond and one-year bond was 1.35 per cent at the start of 2010, when savers willing to tie their money up were rewarded with better rates.

However, now that demand for one-year bonds has become more intense, providers have reacted by competing on rates, with the difference between interest offered on one-year and four-year bonds falling to just 0.7 per cent.

The best deals on the market are still being offered over the internet, which allows providers to cut costs, but building societies have been willing to offer traditional accounts to customers if required. Yorkshire Building Society recently decided to re-issue passbooks after customers said they wanted a better way to keep track of their savings. The passbooks can also be used at Chelsea and Barnsley Building Societies.

Savers tempted by the market-leading deals are advised to act now. Once providers reach financing targets they are liable to withdraw their accounts. RBS and NatWest released a one-year bond on July 16 paying a competitive 3.2 per cent on sums of up to £5,000. But savers have to be quick. The bonds are due to be pulled from the market after just four weeks.

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