Savings rates on the rise amid ISA decline

Average savings rates rise across various sectors, widening the gap with ISA counterparts.

Rates across the savings market observed month-on-month increases, while ISAs experienced a noticeable drop in average returns, according to data from the Moneyfacts UK Savings Trends Treasury Report.

Average rates for a one-year fixed bond increased for the first time since October 2023, reaching 4.59% and marking an end to a seven-month stint of back-to-back cuts. Likewise, longer-term bonds rose by 0.01 percentage points since last month.

Meanwhile, average rates for one-year fixed ISAs fell to 4.40% from 4.42% in May 2024. The same month-on-month drop applies to longer-term ISAs, which now stand at 4.04%, leaving both categories with the lowest average returns since June 2023.

Why are ISA rates falling?

With the effects of the ISA season winding down, demand in the sector has subsided, as a result some providers have reduced rates.

In the easy access sector, for instance, average rates dropped to their lowest point since February 2024 from 3.34% to 3.31%.

As Rachel Springall, Finance Expert at Moneyfacts, explains, this was “before the ISA season got into full swing”, suggesting that rates may have simply returned to pre-season levels.

This being said, with many leading ISAs still offering rates over 5.00% AER, there are plenty of competitive options if you’re looking for a tax-free wrapper on your cash.

Why are shorter-term accounts still outperforming longer-term bonds?

With shorter-term bonds continuing to pay greater returns compared to longer-term accounts, it’s clear that providers are remaining cautious over future economic stability.

“Fixed rates have been rising due to volatile swap rates and lesser expectations of an imminent cut to the Bank of England base rate,” explained Springall.

The base rate has remained at a 16-year high of 5.25% since August 2023, and now isn’t expected to be cut until later this year. While providers may therefore feel confident in raising interest on one-year fixed accounts, the current market seems less certain about demand for longer three- and five-year products.

Springall also noted that challenger banks were “notably active in this sector throughout May” which would explain the recent uptick in short-term average rates as providers try to remain competitive and “entice deposits”.

“It is widely anticipated that interest rates will come down in the future, so savers will need to decide whether now is the time to lock into a longer-term fixed bond instead,” she continued.

More choice for savers

While savers may be disheartened to learn about declining ISA rates, there is still reason to be pleased as product choices rise.

The combined number of savings accounts and ISAs saw a month-on-month rise to 1,973 deals, the highest count since October 2023.

Despite the drop in average rates, the choice of ISAs alone saw a significant increase. The number of accounts available on the market now sits at 553 for this month, a rise from 511 back in June 2023 and the highest count since Moneyfacts’ electronic records began back in February 2007.

With many of these new accounts coming from a wide array of different providers, Springall urged savers to consider unfamiliar names.

“Those savers unfamiliar with the brands that sit in the top rate tables should keep in mind that, when protected by the Financial Services Compensation Scheme (FSCS), they would have the same level of protection as a well-known high street bank.

“Savers would be wise to review and switch their accounts regularly if they want to chase down the best rates,” Springall added.