Shawbrook Bank launches five-year fixed rate bond paying 3%

Shawbrook Bank has hit back at Tesco by upping the rate of its five-year fixed rate bond. But should you lock up your cash for so long?

Shawbrook Bank has thrown down the gauntlet to Tesco and reclaimed its crown as the leading five-year fixed rate bond provider.

Tesco enjoyed just one day at the top of the best buys with its five-year bond paying 2.95%.

Shawbrook has taken back the top spot by upping the 2.9% rate it has had on offer since June by 0.1% to 3.0%.

However, Tesco's four-year fixed rate bond, which pays 2.65%, remains a market leader over this term. It beats the next best deal from Shawbrook of 2.55% by 0.1%. But who knows how long Shawbrook will let this go on for....

Defining features

The new five-year deal from Shawbrook is pretty much the same as the old one.

Savers can invest a minimum of £5,000 up to a maximum of £2 million and interest is paid annually.

But Tesco's five-year deal has a couple of defining features that set it apart from the new market leader.

First of all you only need £2,000 to get access to the rate and you can invest up to £5 million.

Tesco's deal also offers a monthly interest option that pays 2.91%.

This option can generate a monthly income for those with enough capital. So if you had say £50,000 you could choose to get the interest paid into your account each month.

For savers with a big lump sum investment, like those about to retire, this is a beneficial feature.

Whichever bond you go for, the same rule applies. Once you open the account you can’t touch what you put in until the term is up.

That leaves your savings out of action for a pretty substantial amount of time.

So should you lock into a deal for so long?

To fix or not to fix?

With a fixed rate bond you tend to get a better rate the longer you are willing to sacrifice access to your cash.  Locking in like this can protect your savings against falling rates.

For example the average rate on a fixed rate two-year bond this time last year was 3.29%. But today it’s 1.81% according to figures from Moneyfacts. So investors that locked in last year get to hold onto a good rate as rates tumble around them.

However, if rates start to rise during the period your money is locked up, you will lose out as you won’t be able to take advantage by moving your pot onto a better deal.

It’s impossible to know for sure what is going to happen to savings rates, but the general feeling is that they are going to remain low for a few years at least. Read What next for inflation and interest rates?

So in that respect locking in now could be a good idea. But rates can’t stay low forever and with longer term bonds you are at risk of missing the rising tide.

Chasing the best rate

For some though what it comes down to is chasing the best rate in order to protect their savings against the eroding effects of inflation.

Sadly at the moment returns are extremely poor value, wherever you look. The best easy access account pays just 0.67% on average according to Moneyfacts.

Right now the top rates can only be found with long-term fixed rate bonds and the only account around that beats inflation, which stands at 2.8%, is a seven-year bond from Skipton Building Society.

That’s a long time for your cash to be locked in for, but the account pays a fixed rate of 3.5% - a whopper considering what’s on offer from other savings accounts at the moment.

Now Shawbrook's new five-year rate is the only other deal that comes close to battling inflation. You will get two years off the jail time, but a rate that is 0.5% worse.

The best long-term fixed rate deals

You will need to balance the time you are willing to lock up your savings with the rate you want to achieve.

To help you decide on the best home for your money here are the best long term fixed rate deals around.

*Anticipated profit rate

For more information see: The best fixed-rate savings bonds.

More on savings:

The best notice savings accounts

The best instant-access savings accounts

Savings rates: British banks versus foreign banks

Raphaels Bank: a great home for your savings you've probably never heard of