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  • What affects savings rates?

    There are a number of things that affect the interest rate that you’ll receive on your savings. Here are some of the most important, although it’s not an exhaustive list.

    Important information

    This article gives you information to help you make the most of your money, but it isn’t personal advice. If you’re not sure if a certain action is right for you, please ask for advice.

    Important information - This article gives you information to help you make the most of your money, but it isn’t personal advice. If you’re not sure if a certain action is right for you, please ask for advice.

    Bank of England base rate

    The base rate is the rate that the Bank of England (BoE) charges when it lends money to individual banks. It’s often used as a reference when banks set rates on their savings products for customers, which will usually move in line with it.

    This could be seen in early 2020 – the BoE cut the base rate from 0.75% to 0.1% in March and savings rates subsequently fell across the market over the following months.

    Source: Bank of England 31 July 2020

    What is a savings rate and why do banks need savings?

    Banks and building societies make their money by taking savings deposits and lending them out at a higher rate than they pay savers. The difference is called a ‘net interest margin’. The amount of money they need to bring in from savers is therefore dependent on the amount it is able and happy to lend. They don’t need an endless supply of money.

    A savings interest rate can be thought of as the price a bank or building society needs to pay to attract the amount of money they need. Rates will therefore rise and fall in line with how much money they need to bring in to fund its lending activities.

    Where can banks go to get this money?

    Savers are just one place banks can go to get this money. Unlike building societies they can also borrow it from the BoE. If the BoE is lending money to banks at a low rate, there will be less incentive for the individual banks to offer higher rates to savers. Borrowing money from the BoE may also be easier than administering thousands or even millions of savings accounts.

    Which banks have the best savings interest rates

    You’ll rarely see big high street banks offering the best savings rates. They benefit from having established relationships with millions of customers, who are often happy to save with the same bank they have their current account with.

    Instead you’ll often find smaller ‘challenger’ banks and building societies offering the best interest rates. They don’t benefit from having a large brand or established relationships with a big customer base, so they need to offer headline rates to bring money in.

    Sharia-compliant banks also tend to offer higher rates. They don’t pay an interest rate, but instead offer an expected profit rate, in line with Islamic banking principles.

    More about Sharia savings products

    Boost your savings rate with Active Savings

    Active Savings can help you get a better return on your hard-earned cash. It lets you choose savings products from a range of banks and building societies, all through one online account.

    Discover Active Savings

    This website is issued by Hargreaves Lansdown Asset Management Limited (company number 1896481), which is authorised and regulated by the Financial Conduct Authority with firm reference 115248.

    The Active Savings service is provided by Hargreaves Lansdown Savings Limited (company number 8355960). Hargreaves Lansdown Savings Limited is authorised by the Financial Conduct Authority under the Electronic Money Regulations 2011 with firm reference 901007 for the issuing of electronic money. Hargreaves Lansdown Asset Management Limited and Hargreaves Lansdown Savings Limited are subsidiaries of Hargreaves Lansdown plc (company number 2122142).

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