Competition begins pushing Isa rates up

Competition begins pushing Isa rates up

Banks and building societies trying to attract savers are upping their Isa rates.

Research from Moneyfacts reveals Isa rates have risen for the second month in a row - the first time that has happened at the start of the year since the Funding for Lending scheme was launched six years ago. 

The typical no-notice account now pays 0.78 per cent, up from 0.68 per cent in December, while the average long-term fixed rate account pays 1.46 per cent, up from 1.38 per cent.

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But interest rates on Isas still have a long way to recover. In February 2013, the typical no-notice Isa paid 1.46 per cent – almost double today’s rate – while long-term fixed rate accounts paid on average 2.14 per cent.

With interest rates now expected to rise sooner and faster than expected and Funding for Lending drawing to a close, some experts think this year’s Isa season could bring a marked increase in competition between providers.

Charlotte Nelson, finance expert at Moneyfacts, said: "Isa rates have really taken a hit over the past few years and caused Isa seasons to become virtually non-existent. The market may now have reached a turning point."

Historically, providers have promoted Isa rates at the start of the year to entice savers looking to use up their annual allowances. But the launch of Funding for Lending in 2012 meant savings accounts became less important to banks and building society.

"The Term Funding Scheme is also closing at the end of the February and providers have started to consider how they will replace this vital form of funding," Ms Nelson added.

She warned that savers who locked into long-term deals last year may be disappointed as rates rise.

Peter Chadborn, director at adviser firm Plan Money, said: "I expect Cash Isa providers will try to compete with each other during the forthcoming Isa season by hiking their rates, but I don’t expect savers to get excited by the still relatively low returns.

"From a financial planning point of view, money on deposit should be seen as either emergency, immediate-access funds or cash reverse for known short-term future expenditure, so whether rates are 0.78 per cent or 1.78 per cent is largely irrelevant."