Get this market-leading savings account - quick!


Updated on 02 December 2010 | 6 Comments

The one-year bond market has seen tremendous competition of late, but it won't last long!

One thing that many of us want in these tumultuous times is a little certainty and security. And with a fixed rate bond, that’s exactly what you get – a guaranteed rate for a specified time period.

But with interest rates only set to go up, is taking out a bond a good idea?

The case for bonds

The good news is, due to the expected hike in interest rates, providers know they have to work harder to lure you in - and so the rates on offer from bonds tend to be more attractive than those you can expect from easy-access savings accounts.

That is also due to the fact that when you put your money into a bond, you’re waving goodbye to your cash for a period of time – you can’t really get your hands on it. You see, the banks like a bit of certainty too!

So you get a decent rate for locking up your money, but that does mean you can’t access it whenever you want. Bonds are clearly only a good idea for savings that you can do without for a while.

Here are the current market-leading one-year bond deals:

Provider

AER

Minimum deposit

Northern Rock

3.15%

£1

Skipton BS

3.05%

£500

Post Office

3%

£500

Bank of Cyprus

3%

£1

M&S

3%

£500

Norwich & Peterborough BS

3%

£1,000

Britannia BS

3%

£1,000

FirstSave

3%

£1,000

A time of competition

According to financial information provider Moneyfacts, the number of banks offering one-year bonds paying at least 3.00% has rocketed over the past three months from three to 17. That’s a hell of a jump. Why the sudden competition?

In today's video, I'm going to highlight five things you should consider when choosing a savings account.

You have to go back to last year for the answer. Around this time in 2009, there was an awful lot of competition in the one-year bond market, with National Savings & Investments (NS&I) topping the best-buy charts with a great rate, coupled with their 100% security guarantee.

A year on and NS&I are no longer active in the market. Coupled with the maturing money in the various other competitive deals at the time, there are an awful lot of savers out there coming to their end of their existing bond and looking for a new home for their cash. Now is clearly the time to start offering attractive rates in order to entice some new customers (and more importantly, their cash) through your door!

It can’t last

However, this era of exciting rates on one-year bonds is unlikely to last very long.

Related blog post

There’s quite a significant margin between the current record low base rate of 0.5% and the rates on offer from the best bonds, of 3% and above. And that’s not a margin that is particularly sustainable in the long-run for the providers. They clearly only have so much exposure they are willing (and able) to take, and that’s why these competitive deals don’t tend to last long.

What’s more, Moneyfacts reckons that as base rate does start to move northwards, as it is likely to do at some point next year, the providers are only likely to pass on parts of those increase (if anything at all) to the savings deals, in order to reduce that margin. Clearly, now is the time to act.

Fixing for longer

What about longer bonds? After all, just as you secure yourself a better rate by locking your money up for a year, surely you get an even better deal if you lock your cash up for longer?

And that’s very true, as the table below demonstrates.

Provider

Term

AER

Minimum deposit

Post Office

Two years

3.65%

£500

Bank of Cyprus

Two years

3.60%

 

Post Office

Three years

4.00%

£500

Bank of Cyprus

Three years

3.9%

£1

State Bank of India

Four years

4.2%

£1,000

Halifax

Four years

4.05%

£500

AA

Five years

4.5%

£1

State Bank of India

Five years

4.5%

£1,000

However, there is an argument against putting your money in a longer-term bond, and it’s one I tend to agree with. We all know that bank base rate will have to start going up eventually. And while Moneyfacts may be right, in that the banks may not pass all of those increases onto savers, chances are the rates on offer will still rise, if only by small amounts at first. And anyway, there’s bound to be some political pressure put on the banks to pass on the rates in full.

So while the rate on offer from a five-year bond looks good at the moment, if base rate jumps to 4% or higher in the next few years, you’ll likely have an even more attractive range of short-term bonds to choose from. Personally, I think you risk losing out by locking up your cash for a long time at the moment, which is why I’d stick to the one year deals, or at a push, two years.

More: The How-To-Get-Rich List | There’s never been a better time to get a credit card

Compare savings accounts with lovemoney.com

Comments


View Comments

Share the love