High street banks see savings rate beaten by challenger banks

The Moneyfacts UK Savings Trend Report has found that savers putting money into a fixed-rate bond will see better returns on their investment from a challenger bank than from a traditional high street bank.

The study found that on average challenger banks offered rates that were 0.95 per cent higher than high street banks on five-year bonds.

The average rate for the high street (based on a review of 10,000 investments) was 1.50 per cent, while building societies offered an average rate of 1.97 per cent and challenger banks 2.45 per cent.

The report recommends that savers may need to look beyond the high street if they want to make the most out of their savings in the next few years.

Here is a list of average fixed bond rates from June 2019 according to the report:

  High street banks Building societies Challenger banks
One-year fixed bond 1.04 per cent 1.31 per cent 1.88 per cent
Three-year fixed bond 1.38 per cent 1.70 per cent 2.26 per cent
Five-year fixed bond 1.50 per cent 1.97 per cent 2.45 per cent

Challenger banks were launched with the aim of taking on the dominance of well-known, established banks. Two of the most well-known challenger banks are TSB and Virgin Money.

UK challenger banks must be registered with the Financial Conduct Authority and so have protection on their accounts through the Financial Services Compensation Scheme (FSCS).

This means savings deposited with these banks are as safe as with well-known banks and building societies.

Darren Cook, finance expert at Moneyfacts, said: “The disparity between the average rates offered by challenger banks, building societies and high street banks suggests that challenger banks have a greater need to raise capital via customer’s deposits compared to high street banks and building societies.

“The fact that high street banks pay on average 0.95 per cent less on their five-year deals than the average challenger bank rates, indicates that they likely already have funds to manage from their existing customers’ savings and current account balances, whereas challenger banks may need to offer a little more incentive to encourage new customers to invest in their products.”

Links: What is the best challenger bank?