Even after this week's base rate cut, you can still earn 6.5% interest on your savings.
We live in unusual times. Normally, when the Bank of England cuts its base rate, you'd expect mortgage and savings rates to fall. Yet, after this week's base rate cut, two big lenders raised the rates on their mortgages.
What's more, one bank said that it wouldn't cut the interest rate paid on its savings account.
I'm referring to the Kaupthing Edge savings account. Before the base rate cut Kaupthing was already paying a table-topping 6.5%; the bank said yesterday that the 6.5% would remain unchanged.
Kaupthing also gave a guarantee that its savings rate will be at least 0.3% higher than the base rate until 2012.
However, do note that you need to keep at least £1000 in the account to qualify for the 6.5% rate. If your balance falls below £1000 you'll receive no interest whatsoever.
Is your money safe?
So, overall, the account sounds great, but is your money safe? Might Kaupthing go bust?
Well, in the current climate, it would be rash to say that any bank is 100% safe. What's more, at least some market participants seem to think the risk of disaster at Kaupthing is significant.
That's because the current rate for Kaupthing's Credit Default Swaps is very high at 8%.
Let me explain the jargon.....
If you ran a hedge fund and wanted to lend money to Kaupthing, you could take out an insurance policy for that loan in case Kaupthing couldn't pay the loan back.
However, at current prices, you'd have to pay 8% of the value of the loan each year for that insurance. In normal times, you'd expect that figure to be below 1%.
Scary? Maybe.
My hunch is that the Icelandic banks will be fine in the end. But if I'm wrong, your savings in the Kaupthing Edge account will still be safe up to £35,000. The Kaupthing Edge account is operated by a UK company, Kaupthing, Singer & Friedlander, so the Financial Services Compensation Scheme (FSCS) provides the same protection as for any other UK bank.
So, with that guarantee, I'd be happy to put up to £35,000 in a Kaupthing account.
That said, if you want the ultra-safe option, look at Northern Rock's Tracker Online account which pays 6%. Of course, Northern Rock is now owned by the government so you can't get much safer than that........
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