Should you fix your savings for seven years?
Savers looking for a decent return on their cash can get an interest rate of 3.52%. But there’s a catch…
Secure Trust Bank is offering savers the chance to get a 3.52% return on their cash. Although historically this might not sound like much – back in the crazy days of 2007 the best savings rates were around the 7% mark – it’s a decent rate in today’s market.
But there’s a downside: you need to tie up your money for seven years, up until 31st May 2021. You can’t access your cash during this time, nor move it to a different savings account.
Interest on the account is paid out to a separate nominated account (not compounded), meaning a £10,000 lump sum would earn £2,504.11 in seven years. A £1,000 investment would earn £250.39 in interest over the same period.
So should you fix your savings for seven years? Should you lock your money up at all?
Rival rates
Secure Trust Bank isn’t the only institution offering an eye-catching savings rate on long-term savings deals. First Save isn’t far behind – it’s paying 3.5% over seven years. And up until recently Newcastle Building Society also had a seven-year bond on offer, paying 3.5%.
Meanwhile there’s a raft of five-year bonds around the 3% mark. Shawbrook Bank is paying 3.1% over five years, Vanquis Bank is paying 3.01% while Skipton Building Society, Aldermore Bank, Julian Hodge Bank and the Bank of London and the Middle East (BLME) are all paying 3%.
In general the longer you tie your money up for, the higher the rate you’ll get. Best buy four-year bonds will get you 2.86% from Vanquis, three-year bonds stand at 2.70% with ICICI Bank, two-year accounts at 2.32 from Islamic Bank of Britain and one-year fixed rates at 1.90% from Islamic Bank of Britain and Kent Reliance.
The rates are much higher than instant access savings rates. GE Capital Direct currently tops the best buy charts, paying a miserly 1.3%.
Advantages of fixed rate bonds
The main advantage of fixed rate bonds is obviously the high rates on offer. There’s also the discipline factor – if your money’s locked away for a number of years you won’t be tempted (or able) to spend it.
Fixed rate accounts can also help with financial planning as you’ll know exactly how much interest you’ll earn over a fixed period.
Going back to 2007, fixed rate bonds also protected savers against falls in interest rates. Those that locked away their money at 7% for several years were laughing all the way to the bank when rates subsequently collapsed.
But that’s not the case now. With interest rates remaining at 0.5%, and the next move undoubtedly being upwards, there are no potential rate falls to protect yourself against.
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The interest rate conundrum
The quandary savers find themselves in now is that, at some point, interest rates will rise. Predictions about when and how quickly change with the weather, but the general consensus seems to be in about a year’s time.
So come summer 2015, savers who commit to a fixed rate bond of two years or more now may live to regret their decision.
A higher base rate should, in theory, mean that providers offer better savings rates. And while we’re unlikely to see a return to 7% savings rates, there’s a chance better deals than we’re seeing now could come to the market in 2015.
But nothing’s certain. Who predicted that the base rate would fall to 0.5% in March 2009 and stay there for more than five years?
Pitfalls of fixed rate bonds
Missing out on a better interest rate later on isn’t the only downside of fixed rate accounts – there’s also the fact that you can’t get to your cash in an emergency, at least not without a significant penalty such as loss of interest. For this reason, bonds are only suitable for savers with more accessible cash elsewhere.
Another downside is that unlike instant access savings account, many savings bonds only allow a one-off lump sum to be invested at the start of the set period, so you can’t add to the capital.
Bonds also tend to require a higher minimum deposit than normal savings accounts which can usually be opened with as little as £1.
The minimum deposit is normally around the £1,000 mark but some accounts have a much higher minimum – BLME demands a minimum of £25,000 for its fixed term accounts, for example.
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