How to find the best high interest savings account
Do you want to open a high interest savings account? It can be hard finding the best high interest savings account, so Latest Deals has produced this guide to help explain how they work, and answer any questions you may have.
What is a high interest savings account?
A savings account allows you to set aside cash for the future. Different accounts will come with different interest rates, and the higher the interest rate, the more money you’ll make on your savings.
There are different types of high interest accounts available, and you should think about what you need from a savings account to find the best option for you. In this guide, Latest Deals breaks down the various options available, and discusses the pros and cons of a high interest savings account.
What are interest rates?
When you open a savings account, you’re making an agreement with the bank, building society or provider. They will look after your money, and in return you’ll earn a percentage of your savings account total back.
This amount is called interest, and is paid back into your account at regular intervals, usually either monthly or annually. Some providers may also allow you to have your interest deposited into a different account.
Interest rates on savings accounts will either be fixed or variable. A fixed interest rate means that the percentage of interest you earn will remain the same for a set period of time, and a variable interest rate means that it can go up or down.
Different savings accounts come with different interest rates and you should shop around and compare different providers to find the best option for you. However, all interest rates are led by the Bank of England base rate. This is the interest rate that banks or building societies pay when they borrow money from the Bank of England.
The Bank of England runs the country’s economy. So, when the economy’s strong, you’re likely to get a better interest rate than when it’s weak.
IMPORTANT NOTE: If the country’s economy is weak and interest rates are low, it can be difficult to find a high interest savings account. So, when you open a savings account, if you can’t find an interest rate you’re happy with, it’s important not to commit yourself for a long period at a fixed rate. This is because if interest rates begin to increase, you’ll be stuck at the same low rate.
Everyone has a certain amount of interest they can earn on their savings before it becomes taxable. This is called the Personal Savings Allowance (PSA).
You can learn about tax on savings here.
What is compound interest?
Compound interest is what you earn on top of interest you’ve already gained.
When you open a savings account and you start earning interest on your money, usually the interest you accrue will be paid into your savings account. You can then earn interest on top of it, and this is called compound interest.
How to work out compound interest?
How you work out compound interest will depend on the terms of your savings account. You’ll need to know whether your interest is deposited annually or monthly, what your interest rate is, and if your interest rate is fixed.
For example, if you have £2,000 in a savings account at a 2% fixed interest rate, and you leave the interest you earn in the account to gain compound interest, you can see the growth here:
|Number of years saving||Fixed 2% interest rate|
So, you can see that the longer you save for, the more effective compound interest is. This means that, if you can afford to, you can get a better return on your savings if you leave the interest you earn in your savings account.
Types of high interest savings accounts
There are lots of different savings accounts available, and you can read our guide on savings accounts for more information.
Certain types of accounts typically come with higher interest rates, but the rate you get will depend on the provider, and when you apply for the account.
Here are some examples of savings accounts with higher interest rates:
Fixed rate bonds
With a fixed rate bond, you sign up to place your money in a savings account for a set period of time. This term could be from one to five years, and the longer you commit to, the better the rate you’ll likely get.
Fixed rate bonds often offer a higher interest rate than other accounts, as once the term starts you won’t be able to take out your cash until it’s over. So, if you do need to access your funds, you may be better suited to a different type of account.
IMPORTANT NOTE: The interest rate a bank or building society offers you is informed by the Bank of England’s base rate. So, if the economy is weaker, interest rates will be lower. It’s important not to tie yourself into a long term account if interest rates are low, as your money will be stuck at a low rate when there are better rates available.
You can read more about fixed rate bonds here.
Regular savings accounts
With a regular savings account you agree to pay a set amount into it monthly.
Regular saver accounts often offer market-leading interest rates, however they do come with some restrictions. Usually, you need to have a current account with the provider to qualify for a regular savings account. Your regular saver will then be back-linked to your current account.
Also, this type of account often limits the amount you can pay in, to control how much interest you can earn. So, if you have a more substantial sum of money you want to earn interest on, it may be worth exploring other savings account options.
You can read our full guide on regular saving accounts here.
Notice savings accounts
If you open a notice savings account, you’ll need to give notice before withdrawing any of your money from the account. The notice period will vary depending on your account terms.
As you are required to give notice, this account usually offers higher interest rates than accounts where your money is readily available, for example an easy access savings account.
If you know you’ll need your money at some point, but you’re not sure when exactly so you don’t want to commit to a fixed rate bond, this could be worth considering.
You can read more about notice accounts here.
Sharia savings account
Sharia-compliant accounts take a different approach to savings accounts, as Islam forbids paying or earning interest.
So, instead of earning interest on your money, you’ll get ‘expected profit’. This means that the bank will invest your savings and they’ll return some of the money they earn on top of your savings, to you. Typically you’ll reach the expected profit, but there is no guarantee.
Sharia-compliant savings accounts often offer good returns on your savings, and you don’t need to be Muslim to qualify, so it’s worth looking into.
Which is the best high interest savings account?
The answer is that it depends. First and foremost, the right savings account is the one that delivers what you need it to.
Once you’ve decided which type of account is right for you, you can compare interest rates between different providers and find the best banks for saving. The higher the interest rate, the greater the return you’ll make on your money. So, you need to shop around to find the best savings rate available.
|Savings account||Rate of interest|
|Fixed rate bond (one year)||1.3% - 1.52%|
|Regular savings account||1% - 3.5%|
|Notice savings account||0.8% - 1.06%|
*These interest rate figures are an idea of what to expect. They will change over time and vary depending on the provider and account terms.
Compare high interest savings accounts
Generally, the more restrictive an account is, the higher the interest rate you can get (though this isn’t always the case).
So, when you’re comparing accounts trying to find the best one for you, it’s important to weigh up the restrictions accounts have. The more you can compromise on flexibility, the higher the return you’ll likely make on your money.
Also, it’s important that you check the terms of any account you’re thinking of opening carefully, as they’ll vary depending on the provider.
What are introductory bonus rates?
When you open a savings account, certain providers may offer introductory bonus rates. This means that you’ll get a boost on the interest rate they’re offering for the first three to five months. Providers use this as an incentive to encourage you to set up a savings account with them.
Introductory bonus rates are a good way to boost your savings, but once the bonus rate is finished, your interest rate will fall again. This is when you can consider moving your savings to a more competitive option.
Short term, introductory bonus rates can help you increase your money, so they can be a good option. Before opening a savings account with an introductory bonus rate, you may want to consider:
- Is the bonus rate competitive with what other providers are offering?
- What is the basic rate of interest once the bonus rate is over?
- How long is the bonus term?
- Are there any fees that come with the bonus rate?
- Can you access and remove your money once the bonus rate term is over?
- What’s the minimum amount you need to deposit to open the account?
Is a high interest savings account worth it?
A high interest savings account may be worth it, or it may not. It depends on your situation and what you need from a savings account.
Before opening a high interest savings account, you should think about how much money you can realistically save, and for how long you could set it aside for.
Once you’ve established this, you can start to think about whether a high interest savings account is suitable for you.