The economy is constantly changing with the Bank of England regularly meeting to review interest rates, which can go up or down. When interest rates change this can be good or bad news for savers but what if you want neither?
Fixed rate bonds are one way that people can choose to receive a guaranteed return on their savings over a set period of time without any rate changes.
In this article we’ll take you through the basics of fixed rate bonds including how they work, the pros and cons, as well as the different types of bond you might come across.
A fixed rate bond is a type of savings account that offers a fixed interest rate on your savings for a set amount of time. The period of time can vary depending upon the account, for example you can get a six month, one year, two year and longer-term bonds.
Given the timescales, these types of accounts are usually better suited to medium and long-term savers who can afford to lock some cash away until the bond matures.
Fixed rate bonds work on the basis that the savings are set aside for the term of the account. This means that the money that you deposit into the account will be locked in until the end of the term and you will not be able to make withdrawals or access your money.
As mentioned, the interest rate will remain fixed for the term of the account and won’t change. If you’re happy to just lock your money away for a fixed rate over the term, that’s fine, but you might also want to think about whether you think interest rates will go up or down before you lock it away.
If you think interest rates in general will come down during the account term to a lower rate than the rate being offered in your bond, then that might be a good deal. If you think rates are going to go up over the account term to higher than the deal being offered, well maybe you might want to see if you would be better off in a variable rate account for the time being.
Most fixed rate savings accounts require a larger minimum deposit to open the account than you would expect from variable rate savings accounts. For example, a fixed rate bond will typically require a £500 deposit but an easy access savings account can be opened with just £1.
As well as not being able to withdraw your money, you usually aren’t able to make further deposits beyond the initial deposit when you open the account either.
Once you’ve opened your account, your money will start to accrue interest which will be paid at certain times depending on the type of account you’ve opened. At the end of the bond term, your initial deposit plus any interest you’ve accrued will be paid out to you or you can choose to transfer it into another bond or into a more accessible account.
All fixed rate bonds work in essentially the same way, but depending on the account you’ve opened, your interest can be payable at different intervals.
As with the other types of accounts, with an annual interest bond your interest is paid out regularly once per year until the bond matures.
Put simply, a bond ‘matures’ when the term agreed on the account comes to an end. When interest is paid ‘On Maturity’ only, you won’t receive any accrued interest until the agreed term ends. This can be typical for more short-term bonds of a year or less.
With monthly bonds, the interest that you accrue is paid out to you every month. It’s important to be aware that in this instance, the interest is not added to the account, so you won’t benefit from being able to earn additional interest on the interest that’s been added to your account (known as compound interest).
Monthly fixed rate bonds can be used by savers with higher deposits who want the interest paid to them as a source of monthly income, whilst keeping their savings locked away for a period of time.
No, you won’t be able to withdraw your money from the account until the agreed term has ended. Early withdrawals from fixed rate accounts are not allowed or can incur penalties (on fixed rate ISAs), so it’s important to make sure that you’re aware of the terms of the account if there is a chance that you might have to make an early withdrawal.
In most cases, there is unlikely to be the option to make an early withdrawal even with a penalty. This means that you won’t be able to access the funds in the account until a certain date.
There is no limit on the number of fixed rate bonds that you can open at once. However, it is important to remember that bonds are designed for higher value savings that can be locked away and you will earn more interest if you put your available savings together in one place.
One option for managing multiple fixed rate accounts might be to split the money between the different terms. For example you could open a one year and a two year bond.
It’s also worth noting that you can have a fixed rate bond alongside a variable rate savings account too. Given the risk of not being able to access your money during the term of the bond, you might want to consider maintaining some kind of instant access savings alongside the bond so that you have something to fall back on in an emergency.
Fixed rate bonds are an excellent option if you won’t need short-term access to the money that you’re depositing into the account. However, its still important to consider the pros and cons before making a decision.
Fixed rate bonds can be an excellent choice as they provide certainty over the interest rate and the return you’ll receive at the end of the term. You know what return you will get and your money is shielded from possible interest rate reductions.
Fixed rate savings accounts can provide higher interest rates than easy access accounts allowing you to earn more from the money you’ve deposited. Make sure you check before you commit though.
Despite some of the benefits of fixed rate accounts, there are some downsides to them too. The primary risk to fixed rate bonds is that you’ll most likely have no access to the money once its deposited. Additionally, you won’t be able to make regular deposits into the account, so if you don’t have a lump sum to deposit, a fixed rate bond might not be the option for you.
The flip side of being protected from interest rate decreases is that, if interest rates increase, you won’t benefit from an improved rate.
Lastly, it’s worth noting the interest accrued on a fixed rate bond is taxable and the amount depends on your tax band.
With other types of accounts, such as Cash ISAs, your earned interest is completely tax-free and you can also find fixed rate cash ISAs too. Whilst you still can’t withdraw your money, you can close a fixed rate cash ISA early subject to a penalty on the interest earned. Cash ISAs work slightly differently from standard accounts and you can find out more in our guide to cash ISAs.
Here at Mansfield Building Society, we offer a range of different Fixed Rate Bonds to suit your unique needs.
Simply browse our available savings products and find one that suits you best. If you wish to speak to a member of our savings team simply contact us on 01623 676350 or visit your nearest Mansfield Building Society branch!
Please note
This article is for general information only and does not constitute advice. For financial advice, please contact a qualified financial adviser to discuss your personal circumstances.
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