If it wasn't for the internet, finding a good interest rate for your cash would be a tough call following the recent rate cut by the Bank of England. But there is now so much competition between banks to make their mark in the virtual world that there are some market-beating rates available.
Not all of these rates appear in savings best-buy tables because they are being offered as rates on credit balances in current accounts. Even so, the league table of savings rates for no-notice accounts are dominated by web accounts.
Six out of the top 10 no-notice savings accounts in the best buy table from Moneyfacts are web accounts. The e-banks are offering market-beating rates in order to ensure enough people sign up for their products and they reach critical mass. For some providers, like Egg, which tops the Moneyfacts table, it will start to become profitable when it has sold several products to customers with a savings account.
Egg holds number one position in the Moneyfacts league for its Investor account, which is only open to customers who invest in the Egg Isa (Individual savings account). This makes it unsuitable for people who want to use all their Isa allowance to invest in stocks and shares. It pays 7% on balances of £1 and above.
Nationwide building society, which this week prompted a mortgage war by cutting its variable rate for existing as well as new borrowers, has an e-Savings account which pays 6.70% for balances over £1. Close behind is Halifax's Web Saver at 6.35%, Intelligent Finance's Direct Access paying 6% and Egg's Internet Only, also paying 6%.
You can, however, earn up to 7% on credit balances if you open a current account with Cahoot, the new e-bank from the Abbey National. It doesn't appear in the Moneyfacts savings table, however, because it is a current, rather than a traditional savings account.
Some of the high headline rates available from the new internet banks are likely to be loss-leaders and won't be available for ever. First-e, for example, used to pay one of the best interest rates on the market for savings account, at 6% gross, but it has introduced three bands of interest rate and has just dropped the rate to 4.5% gross for balances under £5,000. For balances of £100,000 or more, the rate is 5.5% gross. Its current account is paying 4.75% gross (down from 4.88% gross before the last interest rate cut).
First-e does not offer an overdraft facility or cheque guarantee card. It does offer a savings account, but you are encouraged to use both accounts as pure internet accounts and you may be charged for making telephone calls.
Smile from the Co-operative Bank, pays a top rate of 6% gross on its savings account but to qualify for this you have to have a current account into which you pay your monthly salary or £1,000 a month. In fact, Smile once again topped the league of internet banks in a league table compiled by Gomez, the internet quality measurement firm.
The Smile current account pays 4.85% gross AER (compounded interest rate) on interest on credit balances and has an interest-free overdraft facility up to £500.
The savings account pays a better rate of interest if you already have a current account for balances over £1 or more. The basic rate is 5% gross AER but you could earn an extra 1% gross on your savings by opening both a current account and a savings account.
Nevertheless, canny investors who were planning to switch their current accounts and who get in quickly can enjoy high rates on credit balances. Gomez has drawn up an Internet Banker Scorecard for current accounts from online banks according to ease of use, customer service, product lines and overall cost. According to the latest report, the league is as follows:
1. Smile
2. Nationwide
3. Cahoot
4. First Direct
6. Halifax
9. NatWest
10. The Woolwich
The interest rate war began when Prudential first launched the Egg account as a loss-leader. The account paid the best interest rate on the market. Although Egg eventually lowered the rate and announced this week that it was putting a planned current account on hold, its internet-only savings account is still competitive.
Egg has three savings account options - one is internet-only and the other two offer the option of a telephone or postal account or a cashcard account.
• Marianne Curphey is editor of Guardian Unlimited Money. She is the author of E-Cash, a guide to managing your money, bank account, mortgage and investments online.
