How long should you fix for?
The Bank of England has frozen the base rate at 0.5% for two months in row, prompting something of a rally on fixed savings rates.
Long-term accounts, where the rate is fixed from two to five years, have led the way, with headline AERs as much as 4% above the base rate. However, short-term bonds are now starting to catch up and several new launches prove that you don’t need to lock your money away for several years in order to get a decent return.
Fixed-rate deals provide security of rate for a set period of time, so you can lock your money away and know exactly what your return will be once the term has ended. However, you are unlikely to be able to access your cash during the term without being hit with a penalty or seeing your account closed.
When interest rates were falling at the end of last year and the start of 2009, many savers rushed to put their cash into fixed deals. However, now that the base rate looks unlikely to fall much further (if at all), some savings experts predict that new fixed-rate deals will get more attractive; we’ve already seen rates improve over the past month or so, and this trend could continue.
So, while a five-year savings deal may offer an attractive rate for a long period of time, there is a risk that you could miss out down the line if rates do improve. On the other hand, if rates on new accounts remain stagnant, you’ll be pleased you fixed when you did.
But how do these fixed-rate accounts stack-up on rate and terms?
West Bromwich Building Society offers a one-year E Bond paying 4.29% AER for anyone with at least £5,000 to deposit. Withdrawals or additional deposits are not permitted and you can only manage your account via post or the telephone.
Skipton Building Society also offers a shorter-term bond, paying 4.05% until 30 September 2010. You need to deposit at least £500 to qualify, and withdrawals are not allowed.
Stroud & Swindon pays 4.05% until 30 November 2010 on deposits from £2,000. You can also opt for the same rate until 22 May 2012.
Coventry Building Society pays 4% AER until 31 August 2010 and you only need to have £1 to deposit to qualify.
ICICI Bank pays 3.9% AER on its one-year HiSave bond as long as you have £1,000 to deposit.
Finally, FirstSave continues to pay 3.6% on its 12-month account, for people with at least £1,000 to deposit.
Santander is offering a two-year fixed-rate bond through Abbey, Bradford & Bingley Savings and Alliance & Leicester. The deal pays 4.01% AER on balances between £30,000 to £2 million. This rate is not available to anyone transferring money from another Santander-owned bank, and additional deposits are not allowed.
Withdrawals are permitted but there is a charge of up to 120 days’ loss of interest for closing your bond before the maturity date (1 June 2011).
Cater Allen Private Bank, which is also owned by Santander, has two accounts worth considering.
The first is fixed for two years and pays 3.68% AER on balances between £5,000 and £50,000. This rate increases as your balance does: so, deposit more than £50,000 (the maximum amount that is protected by the Financial Services Compensation Scheme) and your rate will rise to 3.85% AER. If your balance is more than £250,000, the rate rises again to 3.92% AER and if you have £1 million to save, you’ll earn 4%.
Cater Allen’s three-year bond, meanwhile, pays 3.85% for anyone with between £5,000 and £50,000 saved; 4% for anyone with £50,000 to £250,000 deposited; 4.08% if your balance is between £250,000 and £1 million; and 4.11% if you have a balance of £1 million plus.
Elsewhere, ICICI Bank offers a range of fixed-rate savings accounts, allowing you to fix for up to five years. The interest you earn will vary depending on the term.
Both its two-year and three-year accounts pay 4.2% AER, decreasing to 4% if you fix for four years. However, opt for a five-year term and you’ll earn 4.4% AER.
Chesham Building Society also offers a five-year savings bond paying 4.5% AER on balances of at least £1,000. Part-withdrawals are not permitted although you can close the account early, subject to 365 days' loss of interest.
If you haven't had the account for 365 days, then all or part of the charge will be taken from your balance.
Halifax's five-year Websaver account, meanwhile, pays 4.3% AER on deposits of £500 and Nationwide offers an e-bond that pays 4.15% AER over five years for deposits from £1.
Newcastle Building Society’s E Bond pays 4.11% until May 2012 on deposits of £5,000 plus. No withdrawals are allowed during the term of this account.
Finally, NatWest and Royal Bank of Scotland have just launched a three-year fixed-rate account, with the interest rate increasing each year.
In year one you will earn 3% on a minimum balance of £5,000, increasing to 4% in year two and 5% in year three.
This is a mutual organisation owned by its members and not by shareholders. These societies offer a range of financial services but have historically concentrated on taking deposits from savers and lending the money to borrowers as mortgages, hence the name. In the mid-1990s many societies “demutualised” and became banks. One academic study (Heffernan, 2003) found demutualised societies’ pricing on deposits and mortgages was more favourable to shareholders than to customers, with the remaining mutual building societies offering consistently better rates. In 1900, there were 2,286 building societies in the UK; in 2011, there are just 51.
Also referred to as the bank rate or the minimum lending rate, the Bank of England base rate is the lowest rate the Bank uses to discount bills of exchange. This affects consumers as it is used by mainstream lenders and banks as the basis for calculating interest rates on mortgages, loans and savings.
Where APR is the rate charged for money borrowed, Annual equivalent rate is how interest is calculated on money saved. The AER takes into account the frequency the product pays interest and how that interest compounds. So, if two savings products pay the same rate of interest but one pays interest more frequently, that account compounds the interest more frequently and will have a higher AER.
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