Martin Lewis: Urgent warning for savers as base rate held at 5.25%
You should open a fixed savings account NOW in case rates are cut, MoneySavingExpert.com founder Martin Lewis has warned. His message comes as the Bank of England voted to maintain the current base rate at 5.25% following 14 consecutive rises.
Update: 6 October 2023: Martin initially shared his warning below on 22 September, the day after the Bank of England's decision to hold the base rate at 5.25% on 21 September.
Since then, as Martin predicted, the NS&I one-year fixed rate savings account which he mentions in the clip below has been pulled – though the rest of the info still stands. For alternatives, see our Top savings accounts guide.
This rate is used by the central bank to charge other banks and lenders when they borrow money – and so it influences what borrowers pay and what savers earn.
Speaking on ITV's Good Morning Britain, Martin shared his urgent warning for savers and explained what the Bank of England's decision means for mortgage borrowers – watch the full clip below.
ITV's Good Morning Britain – Friday 22 September 2023
From ITV's Good Morning Britain on Friday 22 September 2023, courtesy of ITV. All rights reserved.
Transcript of what Martin said on the show…
Below is a direct transcript of what Martin said, though we've split it into sections for ease.
We're likely to see savings rates drop – so savers should act now
Martin Lewis: "Well, I think the most urgent people need to be thinking about this are savers. Now, it's quite strange, isn't it? Here we are talking this story about Bank of England hasn't done something, but markets move based on expectations.
"What we've had this week is on Wednesday we had inflation figures that were lower than expected, and then we had the Bank of England not putting up interest rates when the markets had expected it puts up interest rates, and that has changed the generalised expectations for the future of interest rates. And that's not just some intangible [thing that] sits over there – that has a real impact on savings rates.
"So it is likely we're going to see savings rates drop, and most specifically... because easy access savings – the variable rates most people have where you can put your money in and take them out when you like – they tend to move with the Bank of England base rate.
"But the rate at which you can get fixed savings which pay more – where you lock your money away for a set period to earn more from it – they tend to move with expectations of future interest rates. So it's those fixed savings that we're talking about. And there's one particularly good deal at the moment I'll talk about in a moment.
Martin's clarion call for savers looking to bag the top rates
"But the thing to understand is, we think – nobody knows – that [this] means the top fixed savings rates are likely to shave down a little bit. But what I put out on social media yesterday and the trick that you need to understand at the moment is: if you go and open a fixed savings now, you normally have a week or two weeks or in some cases up to a month in which to fund it and you can still take your money out if you change your mind.
"What I would suggest people do now, those who've been looking at getting fixed savings, where they're able to lock their money away for a year or two years or three years, is you go and open a top fixed savings account now. Open it, but if you want to see what's going to happen, whether interest rates and other savings rates are going to come down, you don't fund it until the last minute.
"So you can have the facility available at today's high rates, and if rates do drop, you can plonk your money in there and you're locked in on that rate for a year or two. And if rates don't drop or even if they went up the other way – unlikely, but it could happen, markets move all the time – but then you just open another account and you don't put your money in this one.
"And that's the clarion call I've got. And there are often people who are surprised there are more savings accounts in the UK than there are debt accounts. Whenever we do phone-ins on the show if we talk about that, we get more questions about savings than anything else.
"Many people – savings were built up during the pandemic – do have money in savings at the moment. They're desperate to earn as much interest as possible because this is their nest egg or their safety net and actually, right now, if you can afford to lock money away, go open a top fixed savings account and then just hold on a week or two to see what happens before you put your money in."
Surprisingly, NS&I currently offers the top one-year fixed savings
Ben Shephard, Good Morning Britain host: "Is that the same, Martin, with regards to cash ISAs as well?"
Martin: "Yes it is, fixed rate cash ISAs. A cash ISA is just a savings account that you don't put money in.
"But I have to say, the first thing I'd be looking at right now, there is one sort of jaw-droppingly outstanding account on the market and the reason it's jaw droppingly outstanding is not just because it pays the highest rate – which it does, which is 6.2% – but because of who is offering it.
"It's offered by what's called NS&I, which most people will know by its old name of ‘National Savings’. So this is the state-owned financial institute, and the reason that that makes it interesting is when you normally put money in a savings account, you're protected up to £85,000 per person, per financial institution. But you put money in NS&I, ‘National Savings’, people used to get it through the Post Office in the old days, it's not the same as Post Office savings. Well, all your money is backed by the state.
"These accounts allow people to put up to £1,000,000 in. They’re called the ‘guaranteed equity bond’. It's effectively a one-year fix, or the ‘guaranteed income bond’ if you want to take your money out each month, you can put from £500 up to £1,000,000 in and all of it is protected. It's the highest rate of any fix on the market at 6.2%.
"Now you might be thinking, yeah, £1,000,000, but quite a few people have sold houses a year ago or two years ago, have that chunk of money, haven't decided to rebuy because they're waiting to see what's happening to the property market. They're having to spread it over a number of accounts. Well, if you were in that fortunate position to be sitting on a large amount of cash, to be able to put all of it in the top rate in perfect safety is relatively unheard of.
"And I don't think those NS&I accounts are going to be around for very long, so 6.2% in total safety with a big name really is quite an eye-wateringly different deal that's available right now. And they only have to have a certain amount of money coming into NS&I.
Why cash ISAs are worth considering again
"You talk about cash ISAs – now, I always used to say, ‘your money is nicer in a cash ISA’, and then I stopped saying it because a cash ISA is all about tax. When you get interest on savings, you're eligible to pay tax on it.
"But in 2016 or 2017 a new thing called the Personal Savings Allowance was introduced and that means you can earn £1,000 of interest a year without paying tax on it if you're a basic-rate taxpayer of 20%, £500 interest, if you're a top-rate taxpayer. And that took most people out of paying tax and as normal savings pay more than cash ISAs, it meant they should just put money in normal savings because you don't need to protect it.
"But now interest rates have gone up. £1,000 of interest can be generated by £10,000, £15,000, £20,000 of savings, which is starting to get into the realms that some not-so-rich savers have. People do have that money out there, especially pensioners, and if you're a taxpayer, it's now worth considering: have you used your cash ISA if you're going to generate enough interest that you're going to use your thousand pounds a year of interest allowance as a basic-rate taxpayer?
"So, cash ISAs are back, they’re just savings accounts that you don't pay tax on, so if you're going to pay tax on savings, open a cash ISA first and then look at normal savings afterwards."
What about the impact on mortgages?
Kate Garraway, Good Morning Britain host: "Fascinating. Now, what about those that aren't in the fortunate position of saving? They'll be looking at the interest rate, thinking, what do we do about mortgages? All of that. Very briefly, what's the best thing to do?"
Martin: "Well, the answer on mortgages is exactly the reverse of what happens with savings. On mortgages, again, [the fact] that whole inflation and interest rates have gone up by less than it is expected to, means it's possible fixed rates, the rate you can get a new fixed deal on a mortgage, will come down in the short term.
"Where it will go in the longer term is incredibly difficult to say without a crystal ball. But I think we already saw yesterday a few of the big mortgage lenders just slightly bringing down the cost of their new fixed-rate deals. So, if people are in that imminent position, then certainly it's probably going to be cheaper to get a fixed rate today than it was this time last week. Whether they're going to come down to a much more significant level, we just don't know.
You need to decide how much you value certainty
"What the Bank of England has said about interest rates is effectively: 'okay, we're not putting them up, but we expect them to stay high for a good time yet to come'. And it's all on how the markets – and there are various other factors that feed into that – read what's going on with interest rates.
"You really need to look at your own internal finances. If what you want is surety, and you know what you're doing, then fixing gives you surety – and fix longer because you get longer surety and actually longer-term fixes are actually cheaper – if you can afford to ride the markets...
"And if you're really struggling, one of the advantages in the mortgage sector is there are mortgage brokers out there who can give you one-on-one help of finding the best mortgage for you and trying to give you the advice you need that's bespoke and specific. Whereas I can only talk in general terms because I'm talking to millions of people, so it's somewhat different. So, I would be using a mortgage broker at the moment if you're struggling to get the deal that you need.
"But in terms of the interest rates not going up, of course, while for savers, in a way it's a bad thing because I'm saying lock in quickly in case rates come down for mortgage holders looking to come on fixes, it may well be a good thing. But it all depends on where we go over the next few months, to be honest."