Q&A: Should I invest in a fixed rate savings account?
This month, after a prolonged series of interest rate cuts, the Bank of England held the base rate at an historic low of 0.5%. The recent cuts in the base rate have had a disastrous effect on high street savings rates, causing many of us to worry about the diminishing returns on our rainy day funds.
According to recent research by Moneyfacts, 72% of providers have announced cuts in their savings rates, with just 11% of the accounts on the market offering a rate of over 2%.
Now the base rate has stabilised, we may start to see some providers offering savers more competitive deals and higher returns.
In the meantime, some people are choosing to squirrel away their hard-earned cash in fixed-rate accounts with higher interest rates. But how do you know if a fixed rate deal is right for you?
1. What is a fixed rate savings account?
A fixed rate savings account is an account that will guarantee you a specified rate of interest on your investment for a set period of time.
These accounts often offer savers higher interest rates than easy access savings accounts, and are a good way to ensure that the return on your money won’t suddenly deteriorate.
There are currently several fixed rate bonds with rates of over 4%, whereas the top easy access accounts offer around 3%.
However, if you do decide to lock in to a fixed rate bond, you must ensure you are able to lock your money away for the duration of the deal (more on this later).
2. How much money do I need to invest in a fixed rate account?
Many fixed rate deals require you to make a large initial investment. For example, you need a minimum of £5,000 to invest in West Bromwich Building Society’s E-bond, which offers a rate of 4.29% fixed for a year.
Customers who hold Cahoot’s two year bond will receive a rate of 4.01% on their cash – but must be able to invest a whopping £30,000 to qualify for the account.
However, some fixed rate deals require you to invest as little as £1. The Birmingham Midshires Fixed Bond is currently offering a competitive rate of 3.9% AER on a minimum investment of just £1. However, if you opt for this account you must be able to lock your money away for 3 years.
3. Can I make additional deposits?
Fixed rate bonds are usually suitable for people who have a large lump sum to put by. This is because many fixed rate deals won’t allow you to drip feed money into your account over an extended period of time.
Make sure you think carefully about how much money you want to invest, as you may not be allowed to make any additional investments later down the line.
If you think you will want to invest more money at a later date, it’s worth looking around for a fixed rate account which will allow you to do this.
Remember, always check the terms and conditions of any fixed rate savings account you choose. It’s important to know exactly what you’re signing up for as you’ll usually be required to lock your money away for at least 12 months.
4. What happens if I need to access my cash?
If you suspect you might need to access your cash in the next 12 months, you should probably think twice before opting for a fixed rate deal.
A fixed rate account will usually lock in your cash for at least a year – and once your money is tied up you may find it very difficult to withdraw it until the lifetime of your bond expires.
If you take your money out early, you are likely to be hit with a penalty charge or lose a large amount of the interest you’ve earned.
Therefore, if don’t think you can commit your cash to a fixed rate bond, you may be better off opting for an easy access savings account.
5. Which are the best fixed rate savings deals?
When it comes to choosing a fixed rate account, one size may not fit all. It’s important to consider your own circumstances when you decide which one is right for you.
For those people with £1,000 to invest, my current favourite is the ICICI HiSave Fixed Rate Account. It comes with a rate of 3.9% AER on balances for a one year term and 4.1% AER for two years.
If you are looking to invest £5,000, my top pick is West Bromwich Building Society’s E-bond, which offers a fixed rate of 4.29% AER for one year.
You may find that you’ll be offered an even better deal if you lock in your cash for longer.
However, it is crucial to be aware that the longer you commit to lock your money away for, the more sure you must be that you won’t need access to it.
6. What happens is the Bank of England raises the base rate?
Opting for a fixed rate deal will offer you peace of mind that the interest rate paid on your savings will not suddenly drop.
However, the flip side of this is that it can’t go up either!
Therefore, if you opt for a fixed rate bond and the Bank of England subsequently increases the base rate, your savings will not benefit from this.
Given that the base rate seems to have bottomed out, the only way for it to go in the long term is up. Therefore, it may be wise to opt for a fixed rate deal that has a shorter term.
This way, you’ll benefit from a competitive rate now but be free to move your money if the interest rates improve over the next 12 to 24 months.
**This material is for information purposes only and should not be considered financial advice. We strongly encourage our readers not to rely solely on this content, but to seek independent advice when making financial decisions.**
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