This article is taken from Merryn Somerset Webb’s free weekly personal finance email, Money Sense. Click here to sign up now: Money Sense
As more and more people sell their houses with a view to renting (it being cheaper) I’m getting an increasing number of emails asking me what they should be doing with the cash. The answer is a very boring one. Put it into a good savings account and just leave it there.
Why? Because, if your plan is to buy another house with the cash at some point in the future, you have to do two things with the money – first you have to preserve its value in the face of fast rising inflation and second you have to do that without taking any risk at all. And that, says James Dickens of Greirson Dickens, really limits your choices. Here’s how he explains it:
“We invest money because at some point someone (be it us or our children) will want to use it to buy something. The way we invest should therefore be dictated by when we intend to spend the money and how important the thing is that we want to spend it on. A long term ‘must have’ or ‘nice to have’ life goal is ideally suited to equity investment because you can afford to deal with the volatility that comes with equities.
But if you are keeping money for a short term ‘must have’ any volatility at all will jeopardise the achievement of the objective. Providing a family home falls cleanly into the short term ‘must have’ category and that in turn means that any money earmarked for one must go into a bank account.”
Good news then that you are finally able to get a reasonable return on your savings. In an interesting turn up for the books, the banks are suddenly at the mercy of the consumer. No longer are they offering the kinds of interest rates that mean most of us are unable to help our savings even keep up with inflation over a year. Instead, with the credit crunch really starting to bite and money hard to come by in the wholesale markets (see: Here comes the credit crunch) they are being forced to turn to us to raise cash and to pay more than usual for it.
The result? Rates well above the base rate. Northern Rock is offering 6.31%, for example (though note that includes a 1.06% bonus so you’ll have to make sure you move your money on if you still have it on deposit in a year). West Bromwich Building Society is also offering 6.31% (and without the bonus business).
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Better looking still are some of the three month and one and two year deals. I’m not sure I would have advocated locking house money away for very long a year ago but right now it doesn’t look like you are going to lose much by not having your cash immediately to hand – even the optimists are only expecting house prices to stagnate at best.
That means that it is well worth looking at a short term deal from HSBC International: you give them your cash (a minimum of £25,000) for three months and they’ll pay you 7% on it while they’ve got it. If you are sure you aren’t going to need your money for a year you might also look to Anglo Irish, which has a one-year bond on offer paying out 6.9%. West Bromwich Building Society also has an internet only one for sale that pays out 6.86%, still more than 1% above the current base rate, while Derbyshire Building Society is offering 6.85% and Northern Rock – which is in dire need of cash and can’t get any of the other banks to lend to it – have a one year bond at 6.71% available in all branches. The rates on two-year bonds aren’t bad either – Anglo Irish is offering 6.55% for example. These are the highest rates for six years.
So which one should you go for? Emma Simon, writing in the Sunday Telegraph, favours the variable accounts as “all the signs indicate that there may be a few more shots fired in this price war.” So much do the banks need cash that there is every chance a number of them (Northern Rock…) will soon launch more “stonking” deals. Sign up for 6.9% now and you might kick yourself next week when “a higher paying bond comes haring round the corner.”
I think Simon has a point but I’d also point out that while there is a presumption in the market that base interest rates will not rise much further (many people even think that they will fall) it won’t necessarily happen that way. Food prices are rising fast (see last week’s cover story in Moneyweek for more detail on this: Why you should buy a farm – or agricultural stocks as are oil prices. These are not the ingredients for falling inflation nor for falling interest rates: add that to the credit crunch and in no time at all any rate under 7% might look pretty paltry. So go ahead and tie some money up with HSBC or Anglo Irish for a few months or a year but keep the rest in a variable account: it is entirely possible that savings rates will keep rising for some time.
If you’d like to read more personal finance advice from Merryn, you can view the previous issues of Money Sense: click here