Fix savings now before rates fall

Interest rates on fixed rate bonds have fallen back to the same level they were three months ago, so should you fix now before they drop even further?

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In a world of low returns and high inflation, many savers have been turning to fixed rate bonds to secure decent interest payments on their money. But in recent weeks, several providers have cut the rates on their market-leading bonds significantly.

The best one-year fixed bond on the market was paying 3.15% at the start of the month, but it's now paying just 3.00%, while the best three-year fixed rate bond has fallen from 4.30% to 4.15%.

But, despite this reduction in rates, bonds are still one of the best homes for your money in today’s low interest rate environment.

Kevin Mountford, head of banking at moneysupermarket.com, said; "Although consumers do not have access to rates as high as those that were paid three or four years ago, fixed rate bonds still represent a great option for savers prepared to lock away their cash."

He explained that the drop in rates is partly due to increased competition in the market. For example, when Bank of Baroda introduced its market-leading fixed rate savings products, exclusively through moneysupermarket.com, other providers upped their game in response.

Because this increased the number of savers using the accounts, rates are now dropping back to manage demand.

Kevin said: "Despite the recent drop in rates, bonds will continue to dominate the savings market for some time to come and we would urge anyone looking to lock their money away to do so now before rates drop further."

Is a fixed rate bond right for me?

Not everyone will want to save into a fixed rate bond, as you cannot normally get access to your cash during the fixed term.

However, if you have a lump sum you are able to lock away for between one and five years, and you don't mind losing access to it in order to get some of the best rates on the market, then a fixed rate bond may well be right for you.

The very best rates are paid on the longer-term fixes and this can be a bit of a gamble. By locking your money away, you receive a higher rate – but you can’t be certain this rate will still be competitive a few years down the line.

The base rate may be low right now, but no one is sure when it will start to rise - it could be months or even years. You need to make sure you are happy with this risk before you lock in.

Of course, there are some deals that offer the best of both worlds. For example, the Santander One Year Tracker Bond means you lose access to your money for 12 months, but the rate paid tracks at 2.50% above the Bank of England’s base rate, giving a current payable rate of 3.00%.

This account can give peace of mind to people worried about locking in and losing out if interest rates subsequently rise.

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What are the best fixed rate bonds?

If you are prepared to lock in for as long as five years, you'll have your pick of the best returns on the market.

Top of the tables is the Bank of Baroda MAX 5 Year Fixed Rate Bond, paying 4.80% on a minimum balance of £500.

Baroda might be an Indian bank, but your money is fully protected under the Financial Services Compensation Scheme (FSCS), meaning the first £50,000 is guaranteed - £100,000 if it's a joint account.

The next best 5-year rate comes from ICICI Bank, another Indian bank that is also protected by the FSCS. You can earn 4.75% with ICICI, but the minimum investment is a higher £1,000.

There’s also the Rothschild Reserve Fixed Rate Deposit account, paying 4.60%, although you’ll need a hefty minimum investment of £20,000 to qualify.

Of course, many people will find it inconvenient to lose access to their money for that long. If you want a shorter-term option, a two or three-year bond might be more suitable.

Aldermore's 3 Year Fixed Rate Account pays an impressive 4.15% on a minimum investment of £1,000, while Cheshire, Derbyshire and Dunfermline building societies all pay a competitive rate of 4.11%.

The market-leading two-year fixed rate bond is from Stroud & Swindon and pays a decent rate of 3.70%.

If you only want to lock in for one year, you can earn 3.00% with FirstSave and Wesleyan’s fixed rate bonds, but you’ll need a minimum investment of £1,000.

Savers with at least £10,000 to squirrel away can get 3.00% with the Santander 15 Month Fixed Rate Bond (or 2.75% on lower balances).

If you have a large sum and you want to fix for a shorter time, the NatWest 1 Year Fixed Rate Bond pays 3.00%, but only on minimum investments of £50,000. Otherwise, you earn 2.5% on balances over £5,000 and 2.75% on balances above £25,000.

What if you want access to your cash?

It is possible to get a fixed rate account with unlimited access, such as the new Leeds Building Society short-term Fixed Rate Postal Bond, which pays 2.50% fixed until the end of March next year.

Alternatively, you may want to consider a cash ISA, which will give you tax-free returns on up to £5,100 this tax year.

You can get ISA versions of any kind of savings accounts, including fixed rate bonds, but if you're planning on saving some cash and you don't know when you'll need it, an easy access cash ISA could be a good option.

For example, the Principality Building Society e-ISA Issue 2 pays a decent 2.80% and allows you to transfer cash in from existing accounts. There’s also the Halifax ISA Direct Reward, that pays 2.80% and allows instant access and transfers in. Some current account holders will qualify for a bonus, boosting the rate to 3.00%.

If you have a minimum of £9,000 to save in an ISA (which will necessarily include a transfer from a previous year), Santander's Direct ISA Issue 6 pays 2.75%, or 2.00% on smaller investments.

Savers who want the returns available through a fixed rate bond, but still want to make use of their annual ISA allowance can earn a fantastic 4.25% on a minimum investment of £500 with the Halifax Fixed Rate ISA Saver.

That same deal is available from the Bank of Scotland.

Easy access accounts

If you've used up your ISA allowance and want somewhere accessible for your remaining savings, a simple easy access account might be best.

Again, it's important to get the best rate you can to avoid inflation eating away at the value of your savings pot.

The best rate available - 2.80% - is with the AA Internet Extra (Issue 3) account. As the name suggests, you can only manage your money online and not in branch.

Next up are the Santander eSaver Issue 2 account, the Post Office Online Saver account and the ING Direct Savings Account, all paying 2.75%. Again, these are web-based accounts, although the ING offering can also be managed by phone.

Please note: Any rates or deals mentioned in this article were available at the time of writing. Click on a highlighted product and apply direct.

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