Why a stamp duty extension could impact your savings rates

For some of us, one of the biggest impacts of the pandemic has been our change in lifestyle.

Being confined to our homes has made lots of us look for more outdoor space, the option of a home office or just to get out to the countryside.

Estate agents went from a grinding halt during the first lockdown, to running a million miles an hour as soon as some restrictions started to lift.

The chancellor’s decision to waive stamp duty for the first £500,000 of property purchases helped to magnify this increase in demand. It’s a big reason behind the huge rise in the number of mortgage approvals over the second half of last year.

Mortgage approvals

Source: Bank of England.

The domino effect on savings

The rates banks pay on savings accounts are linked to the amount of money they’re lending. And mortgage approvals are a key indicator of this.

If banks are lending more money out, they’ll need to bring more in from savers. Usually, they’ll have to pay a premium to get it – meaning higher rates for savers.

On the other hand, if lending is expected to reduce, they don’t need to bring as much in, so they can cut savings rates to stem inflows.

Which is why next month’s stamp duty decision could have a big impact on the savings market. It’s thought that thousands of house purchases will fall through if they can’t complete in time for the stamp duty deadline. Meanwhile the whole supply chain, like conveyancers and surveyors, are rushed off their feet.

That makes it difficult for banks to forecast the amount of money they need. If the stamp duty deadline isn’t extended, there’s a risk that banks’ lending will begin to dry up. Especially if the economy doesn’t open up and increase our spending on things like credit cards.

Apart from changing our living conditions, the pandemic has transformed our finances too. We’ve shifted from a nation of borrowers to a nation of savers. In the last year households have saved an extra £152bn while, at the same time, paying £16bn of debt.

This has left banks awash with money that they can’t, or don’t want to, lend out. The result has seen savings steadily fall over the last year, with big banks being some of the first to trim their rates to the bare bones.

Average savings rates

Source: Bank of England, 31 Jan 2021.

So, with less lending happening elsewhere, banks are relying more on the housing market and keeping a close eye on the chancellor’s decision.

Of course, this might not all play out like we expect. Thousands of house purchases might fall through if they don’t complete in time. But some buyers might be too invested in the process and decide to continue even though it’ll cost more.

At the same time, an extension doesn’t necessarily mean savings rates are spared. We’re still saving huge amounts (£20bn in December alone), and the property market has already showed signs of slowing down.

So what are your options?

Lots of us are saving in instant access accounts with the same bank we have our current account with. But these pay some of the lowest rates – lots offer just 0.01%.

The first choice is a simple one – look elsewhere. Our Active Savings service makes this simple.

Challenger banks usually pay better rates, and for all banking licences, the first £85,000 of eligible deposits are covered by the Financial Services Compensation Scheme (FSCS). This could help to reduce the risk of moving your savings away from your usual bank, to a smaller one.

Secondly, think about whether you need all your cash in an instant access account.

You’ll need your ‘rainy day fund’ in an easily accessible account in case of emergencies. Financial planners usually suggest 3-6 months’ worth of expenses if you’re working, and 1-3 years’ worth if you’re retired. This could be different depending on your circumstances though. For anything over this you could think about fixed term savings. With Active Savings you can choose products from different banks but still see them all in one place, alongside any investments you hold with HL.

Fixed term products usually pay a better rate than instant or easy access accounts. Normally the longer you fix for, the better the rate. The trade-off is you can’t usually access your money until the product ends.

They also pay a fixed rate, so it won’t change for the life of the product. If you’re concerned rates might fall in the future, fixed term products could offer some peace of mind.

A selection of products under one roof

Try Active Savings. With one online account you can choose easy access and fixed term products from a range of banks and building societies.

Opening new products is easy and takes just a few clicks. You won’t have the usual hassle of opening products with new providers directly, and you’ll see everything together in one online account, making it easy to manage.

Instant access products allow immediate withdrawals, the Active Savings service offers easy access products and withdrawals usually take one working day.

This article and the Active Savings service don’t provide personal advice. Please remember that inflation reduces the future spending power of cash.

AER (Annual Equivalent Rate) - AER shows what the interest rate/expected profit rate would be if it was paid and compounded once each year. It helps you compare the rates on different savings products.

Gross - The interest rate without any tax removed. Interest/profits are paid gross. You are responsible for paying any tax due on interest/profits that exceed your Personal Savings Allowance to HM Revenue & Customs. Tax treatment can change.

Expected profit rate (EPR): Islamic banks offer an expected profit rate rather than interest on their savings products in order to comply with Sharia banking principles.

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.