Banks give savers a raw deal – can you beat them with a tracker account?

Rising interest rates are posing a dilemma for savers: should you take out a competitive fixed-rate bond now, or hold off to see if rates will go up even more?

Rather than getting stuck with a rate that won’t budge, there is another option: a savings tracker account. 

This niche kind of savings account increases and decreases in line with the Bank of England base rate. This wasn’t a very appealing prospect back when the base rate was stuck at an historic low of 0.1pc, but since it hit 5.25pc in August – where it is set to stay until at least November – you could end up earning more interest than traditional savings accounts.

High street banks have been repeatedly called out for failing to pass on Bank Rate rises to savers. But, as tracker accounts are contractually tied to the base rate, you’ll automatically get a bump in interest whenever it rises.

Here, Telegraph Money sets out everything you’ll need to weigh up before making this big savings decision.

What are the best savings tracker rates?

There are only a small number of savings tracker accounts on the market and, while they do track the base rate in some way, it may not be how you’d expect.

The highest paying tracker account on the market is the Family Building Society 2 Year Tracker Rate Bond, which is currently at 5pc. It pays 0.25pc below the base rate for annual interest, or 0.3pc below base rate for monthly interest, and you have to commit for the full two years – during which time the Bank Rate could change significantly.

Dudley Building Society also offers an easy-access tracker account, but the rates on offer are pretty low. Savings between £50 and £500 receive 2.45pc, and you’ll get 2.5pc if your balance tops £500. The interest rate is guaranteed to never fall more than 5pc below the base rate – a term that would only be of use if the base rate was far higher.

If you’re looking for a tax-free option, Family Building Society offers a Market Tracker Cash Isa paying 3.66pc (rising to 4.69pc from October 1 2023). This account doesn’t track the base rate; instead, it changes monthly based on the average of the 20 highest cash Isa rates on the market.

Can savings tracker rates be beaten?

As it stands, none of the savings tracker accounts pay a market-leading rate when compared to equivalent fixed-rate or easy-access accounts. 

For instance, the top-rate two-year fixed-rate bond from Ford Money pays 6.05pc, compared to the 4.75pc two-year tracker from Family Building Society. Given its terms, the tracker account would only beat this rate if the base rate were to rise to more than 6.3pc, which is higher than experts have predicted.

A “normal” easy-access account can currently also beat the tracker option. Leeds Building Society pays the current market-leading rate of 5.1pc. 

“The key regarding whether to choose a tracker account is really down to what you believe will happen to the Bank Rate, as the rate is guaranteed to react to any base rate announcement,” said Anna Bowes of SavingsChampion.co.uk.

Tracker accounts do still beat some of the paltry rates on offer from high street banks, which have recently drawn criticism from the Financial Conduct Authority, which said certain banks have passed on less than 30pc of interest rate rises to savers.

“The good news is that savings rates have once again become far more tethered to what happens to the Bank of England base rate,” said Ms Bowes. 

“However, with the exception of some tracker accounts, we have not seen any variable-rate accounts passing the full base rate increases. And the increases that have occurred vary wildly from bank to bank.”

Will the base rate keep rising?

The Bank has been steadily increasing the base rate since December 2022 in a bid to bring down inflation, which has remained well above the target 2pc. 

Currently at 5.25pc, the next base rate decision is due to be announced by the Bank of England Monetary Policy Committee (MPC) on November 2.  

The Bank Rate is now expected to have peaked – far lower than predictions earlier this year following encouraging signs that inflation is easing. CPI inflation fell to 6.7pc in August, down from 6.8pc in July. 

So-called “core inflation”, which had previously proved stubborn, is also moving in the right direction, having fallen to 6.2pc in August, down from 6.9pc the month before. This measure strips out factors such as energy, food, alcohol and tobacco, and has been a key factor in the Bank’s previous interest rate decisions.

This makes longer-term savings decisions particularly difficult. Ms Bowes said: “As we are possibly near the top of the interest rate cycle, it’s a tricky time to decide whether to simply pick the best rates on the market or a tracker, as it depends on what you think will happen to the base rate in both the short and longer term.”

This article is kept updated with the latest information.