Best short-term fixed savings rate makes biggest jump in almost a year

Nevertheless, those coming to the end of a competitive two-year fixed deal could lose out on almost £350 in interest when they reinvest.

Top returns on a one-year bond recovered lost ground throughout June, however, savers with a competitive fixed deal set to mature this month must brace themselves to earn less when they reinvest.

Having previously slumped to 4.45%, the best rate in the sector rose by its biggest monthly margin since to August 2024 to pay 4.55% by July, according to Moneyfacts’ data. Nevertheless, it’s a far cry from the 5.25% available a year ago; savers coming to the end of such a deal would receive £70 less interest upon reinvesting their cash in this month’s top-paying account (based on a £10,000 deposit).

Meanwhile, those who locked their money away in a two-year bond paying a market-leading 6.10% in July 2023 will need to account for a larger loss of interest. While the top two-year fixed rate improved slightly from 4.44% to 4.45% between June and July, it’ll pay almost £350 less than the sector’s best account from two years ago (also based on a £10,000 deposit).

Otherwise, leading longer-term fixed rates saw limited movement amid ongoing economic uncertainty and swap market volatility. The best three-year fixed savings rate remained at 4.45%, while the top four- and five-year fixed bonds paid 4.54% and 4.64%, respectively, for a third consecutive month.

Is there still an incentive to save?

Despite top fixed rates having cooled off considerably from their recent highs, there are still plenty of reasons to save.

For instance, with inflation forecast to creep higher later this year, setting money aside in a competitive account could be crucial for combatting the rising cost of living. Where a savings account offers less than the current rate of inflation, your hard-earned cash is at risk of losing purchasing power (i.e. the same amount of money buys less).

However, savers may need to act fast to take advantage of an attractive fixed deal before it disappears, as expectations for the Bank of England to reduce the UK’s central interest rate threaten to further diminish returns on savings.

Fortunately, challenger banks remain particularly active on our one- and two-year fixed bond charts. “Generally, this sector of the market is more competitive as they are a good way for challenger banks to test savers’ appetites and fund their future lending,” explained Caitlyn Eastell, Spokesperson at Moneyfactcompare.co.uk.

That being said, Eastell reminded seven million higher-rate taxpayers to be mindful of their Personal Savings Allowance (PSA) – especially those with larger deposits who “could be hit with an unexpected tax bill” if they take home more than £500 yearly in interest from their savings.

ISAs remain a popular alternative for those wanting to shield their money from the taxman. While the Chancellor of the Exchequer is expected to lower the amount that can be deposited into cash ISAs each year, for the time being, savers can continue to plough their entire £20,000 annual ISA allowance into these tax wrappers should they wish.