You can earn a fixed rate of 3.5% with Skipton’s unique seven-year fixed rate bond. But should you lock-up your savings for so long?
Skipton Building Society has launched a new fixed rate bond paying a whopping 3.5%.
It’s a leading rate, but savers will have to keep their cash locked up for seven years to benefit from it.
Currently no other provider is so bold to ask for such a long-term commitment.
Unique deal
The Skipton seven-year fixed rate bond is unique in the market at the moment as it is the longest lasting fixed term available on a cash savings account.
Traditionally banks and building societies tend to offer savers a maximum five-year fixed rate term.
It's been five years since there was a bond offering a term of longer than five years, so those looking for a long-term home for their savings have had a big wait.
The new Skipton bond will only have a short shelf life as it is a limited edition account that could be withdrawn at any time.
Only one account is permitted per customer, but savers can add to the initial deposit as long as the issue remains open.
[SPOTLIGHT]Accounts can be opened in branch or over the phone and you can invest from £500 up to £10,000.
Interest is calculated daily and paid either annually or monthly, but you won’t be able to make a withdrawal until the bond matures.
Who could benefit?
For those chasing the highest returns with enough money to spare the Skipton deal is the best going.
The seven-year bond might be particularly useful for those approaching retirement who want a low-risk investment at the best possible rate or those who have a lump sum they want to use to supplement an income with the monthly interest on offer.
However, the seven-year bond has limitations like an unusual £10,000 cap on investment for single applicants and £20,000 for joint. Shawbrook Bank’s leading five-year deal which pays 2.90% either annually or monthly allows a maximum investment of £2 million. And of course you won't be able to access that cash before maturity.
Why should you fix?
In general locking your money away for longer gets you access to a better rate.
Here’s a table showing how the return on fixed rate bonds get better the longer the fixed-term period is.
|
Term |
Account |
Interest rate AER |
|
One-year |
Kent Reliance BS One-Year Fixed Rate Bond Issue 13 |
2.05% |
|
Two years |
Kent Reliance BS Two-Year Fixed Rate Bond Issue 15 |
2.35% |
|
Three years |
ICICI Bank UK HiSAVE Fixed Rate Account |
2.55% |
|
Four years |
Shawbrook Bank Four-Year Fixed Rate Bond Issue 6 |
2.55% |
|
Five years |
FirstSave Five-Year Fixed Rate Bond / Shawbrook Bank Five-Year Fixed-Rate Bond Issue 7 |
2.90% |
|
Seven years |
Skipton Seven-Year Limited Edition Fixed Rate Bond |
3.50% |
As you can see committing your cash to a seven-year sentence will get you a rate that is 0.60% better than the next best deal.
On the surface it looks like a better offer, but the longer the fixed rate period the bigger the gamble.
Weighing up the gamble
A fixed rate bond guarantees a fixed return for the duration of the term, which safeguards your savings against falling rates. But if rates start to rise during the term you will lose out as you won’t be able to take advantage by moving your money.
With hindsight it’s clear that fixing has worked for last year’s investors. Here’s a table showing how the average rates on fixed rate bonds have dropped in the last 12 months.
|
Term |
Average rate 2012 |
Average rate today |
Percentage change |
|
One-year |
2.70% |
1.60% |
-1.1% |
|
Two years |
3.34% |
1.85% |
-1.49% |
|
Three years |
3.39% |
2.05% |
-1.34% |
|
Four years |
3.73% |
2.06% |
-1.67% |
|
Five years |
3.88% |
2.41% |
-1.51% |
Source: Moneyfacts.co.uk
Those that locked into fixed rate bonds last year would have benefitted as rates have plummeted.
Four-year bonds have fared the worst over the past year, falling by 1.67% on average. So those that opened an account in 2012 are likely to be pretty chuffed with themselves at the moment. But they still have to wait three years to fully understand how well their choice plays out.
Longer term investments tend to iron out peaks and troughs in interest rates over time. Here’s what average five-year bonds have paid over the past five years.
|
Term |
Average rate 2008 |
Average rate 2009 |
Average rate 2010 |
Average rate 2011 |
Average rate 2012 |
Overall average for five-year term deals |
|
Five years |
5.31% |
3.74% |
4.12% |
4.20% |
3.88% |
4.25% |
Source: Moneyfacts.co.uk
If you had locked into a five-year rate back in 2008 you might still be enjoying returns of 5.31% on your savings rather than an average 2.41% if you opened an account now.
Overall the average rate of five-year bonds over the past five years has been 4.25%, so it has worked out to be a good investment over the timeframe.
But hindsight isn’t the best tool to make a decision now. If you are concerned with getting the best return for your money, you will have to try to predict what is going to happen in the future.
Future proofing savings
We are currently experiencing a historically exceptional period of low interest rates, partly because of the record low Bank of England base rate but also because of the effects of the Funding for Lending Scheme. Some predict these will remain low for some time and fall further still, in which case locking into a good rate now would be a good move.
But there are signs that saving rates could be making a recovery. Just last week three providers went against the grain and put up the returns on accounts. Read Shock! Some savings rates are actually going UP for more. If this becomes a long-term trend it might not be the best time to lock-in for so long.
For the latest fixed rate deals check out: The best fixed rate savings bonds.
Thanks to Moneyfacts for help with this article.
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