Challenger banks boost rates competition for savers

Signs of life are returning to the savings market as a wave of lesser-known challenger providers ramp up competition to attract people's cash.

Releasing figures that will bring fresh hope for savers, Moneyfacts.co.uk said that for the first time since a government scheme was introduced three years ago, the rates on offer on one-year bonds are back on an upward trend.

A government scheme called Funding for Lending, introduced in summer 2012, was blamed for squashing savings rates down further in a low interest rate environment.

The scheme gave banks access to cheap funding on condition that they passed the benefits on to borrowers, but experts say this also meant lenders were less reliant on having to attract savers' money by offering decent rates.

In June, the top-paying fixed rate bond on the market had a rate of 1.9%, but by July this had edged up to 2.05%. The top-paying one-year bonds now have a 2.06% rate, according to Moneyfacts.

Average fixed one-year bond rates are also heading upwards, from 1.41% a year ago to 1.47%.

Sitting at the top of Moneyfacts' "best buy" one-year bond table is Charter Savings Bank and RCI Bank UK, both of whom offer deals paying 2.06%.

Also on the list are Kent Reliance and Shawbrook Bank, which offer deals paying 1.95%, while Paragon Bank has a bond at 1.91% and United Trust Bank, BM Savings, Bank of Cyprus UK, Al Rayan Bank and Aldermore all offer one-year bonds paying 1.9%.

Charlotte Nelson, a finance expert at Moneyfacts.co.uk, said: "July finally seems to have seen the end of the rate-cutting trend, with more providers increasing rates on their one-year fixed rate bonds than decreasing them.

"This is due to fierce competition between challenger banks, which are trying to dominate this sector."

With Bank of England governor Mark Carney recently suggesting the base rate could start to increase from its historic 0.5% low around the turn of the year, even better savings rates could be on the horizon.

Ms Nelson said: "With a base rate rise looming, savers will be reluctant to tie up their money for longer than a year, so a one-year fixed rate bond could be the perfect option for those who don't want to miss out on the opportunity to secure better rates in the future.

"The competition between these challenger banks will hopefully continue, keeping rates rising and spurring the main banks into offering better returns. However, savers know all too well that rates can fall just as quickly as they rise, so they shouldn't wait too long to secure a great one-year fixed rate deal."