Great News From The Credit Crunch!

Since July, borrowing problems have caused worldwide mayhem in financial markets. However, this is good news for savers, as interest rates are rising again.

Unless you've managed to avoid current affairs for the past two months, then you're probably aware of the ongoing turmoil in world financial markets.

Since July, mounting problems with financial instruments linked to subprime mortgages in the US have caused stock markets to take a dive. This crisis, branded a credit crunch, has arisen because American mortgage lenders have been dishing out loans left, right and centre without worrying too much about the creditworthiness of their borrowers.

Having lent too much money to homeowners with poor credit records (so-called `subprime' borrowers), US lenders are now experiencing record levels of arrears, defaults and repossession. This has hit banks hard, restricting their ability to lend to individuals and companies. Hence, markets for company debt have practically ground to a halt over the past eight weeks, sending share and corporate bond prices sliding.

Although the repercussions of the subprime slump are being felt all over the world, it has produced some great news for British savers. Normally, banks and building societies only increase the interest rates paid by saving accounts in response to a rise in the Bank of England's base rate. However, the credit crunch has left many financial firms needing ready cash, so they have been busily raising savings rates in order to grab more cash from British savers.

This effect is particularly noticeable in the market for fixed-rate savings accounts, sometimes referred to as `term' accounts or savings `bonds'. Indeed, in return for tying up your money for a year or more, you can enjoy rates of interest that exceed the base rate (currently 5.75% a year) by 1% or more. For example, these savings providers increased their interest rates last week in a battle to grab more of our money:

Source: Moneyfacts, 5 September 2007

As you can see, if you're prepared to avoid dipping into your savings pot for at least a year, then you can enjoy before-tax interest rates ranging from 6.65% to 6.85% a year. Even after basic-rate tax of 20%, these rates range from 5.32% to 5.48% a year. These easily beat inflation (rising prices are the saver's worst enemy), which is running at 3.8% a year, as measured by the Retail Prices Index (RPI).

These are terrifically attractive rates for risk-averse Brits, especially as savings rates will come down next year if, as expected, the Bank of England cuts its base rate in response to lower inflation. Indeed, they are some of the highest savings rates I've seen since the turn of the century. What's more, you don't need to lose sleep worrying about the financial security of the above providers, as all are covered by the Financial Services Compensation Scheme (FSCS).

Therefore, if you want to grab a great rate, I'd act now, as rates could fall back while you're dragging your feet. Finally, although the above accounts are great for savers who don't need access to their cash, they're not suitable homes for your emergency fund or rainy-day money. For easy access to your savings, I'd recommend one of these three popular, table-topping savings accounts:

Here's wishing you many more years of smarter saving!

More: The Perfect Savings Account | Earn 12% A Year (With Strings Attached)