Money Insider: Latest inflation hike is further blow to savers

The latest inflation figures (CPI) released this week signalled further bad news for UK savers, who are already struggling to get a decent return on their cash.

With CPI up sharply to 1.9 per cent, a basic-rate taxpayer now needs to secure a rate of at least 2.375 per cent gross just to maintain the spending power of their savings pot. But almost nine out of ten variable rate accounts are currently paying less than this.

With inflation predicted to rise further, savers need to check the rate on their account to ensure they're not among those losing out and seeing the value of their cash being eroded.

The situation for higher-rate taxpayers is even more depressing, with 99 per cent of accounts failing to pay the required rate of at least 3.17 per cent before tax.

It's important that you don't allow your savings provider to profit at your expense. You've probably had to work hard to build up your savings balance, so don't let its value dwindle in an account offering a derisory rate of return.

To get a positive return on the bulk of your savings, try to make full use of your ISA allowance and then take advantage of the better rates on offer in the fixed-rate bond market.

If you fix now, you can get 3.75 per cent for one year from State Bank of India, 4.25 per cent from Bank of Cyprus UK or SAGA for two years, right through to 5.15 per cent from Halifax or 5.25 per cent from State Bank of India if you're happy to commit your cash for a five-year term.

On a brighter note there was an interesting new savings product launched by Leeds Building Society this week. The Short Term Postal Bond pays a fixed rate of 2.75 per cent gross until 31 May 2010. The beauty of this six-month bond is that even though the rate is fixed you are still able to access all your cash if you need it without giving notice or incurring any penalty.

With many experts predicting that interest rates will stay low throughout most of the coming year, this flexible product – which is currently paying 2.25 per cent above base rate – is likely to prove extremely popular.

Mortgage market ending the year on a high

The increased competition seen in the mortgage market over the last couple of months shows no signs of easing off, and plenty more keenly priced products are up for grabs this week.

One mortgage offer certainly caught my eye. Yorkshire Building Society, mindful that stamp duty will once again become payable on property purchases of £125,000 and over with effect from 1 January, is offering one per cent cash back with its latest mortgage to help home-movers offset the cost of this one-off tax.

The new deal offers a competitive 3.89 per cent fixed rate for two years, with a fee of £495 and one per cent cashback on mortgages up to £250,000. An offset version is also available at 3.99 per cent fixed for two years, with both deals available up to 75 per cent LTV.

There are a couple of marginally cheaper two-year fixed-rate deals out there from Newcastle BS and Principality BS. However, neither comes with the cashback incentive, which could be worth as much as £2,500.

Another new deal worthy of mention is the three-year fixed-rate mortgage from ING Direct (UK), which shot to the top of the best-buy tables this week. Available for advances to 75 per cent LTV this mortgage is likely to prove a big hit, with a tempting rate of 4.29 per cent with £795 fee.

Andrew Hagger is a money analyst at Moneynet.co.uk