Are five-year savings deals worth it?

31 March 2009

A number of competitive fixed-rate savings account of recently been launched but their long terms mean savers could end up missing out down the line.

Nationwide, for example, has just launched an account paying 4.15% AER - but you will have to lock your money away for five years. Halifax's websaver, meanwhile, also pays 4.1% AER on deposits of £500 but again this is a five-year fixed deal.

The Bank of England base rate is currently at an all-time low of just 0.5%, and opinion is divided as to whether this will stay low for some time or if the central bank might increase it to curb inflation.

With several providers offering better rates for people prepared to fix for some time, the temptation for savers hit by low interest rates might be to grab them while they can. But this is a gamble – even if the base rate does remain low for some time, financial pressures on banks could see many hike savings rates in a bid to tempt in savers and store of their coffers.

David Black, head of banking at Defaqto, says the “noticeable” influx of longer term fixed-rate deals over the past few weeks is mainly down to savings providers looking to secure new customers who won’t disappear after a year or so.

“The general view appears to be that quantitative easing, where the Bank of England creates more money, will push up inflation and, therefore, the base rate as well,” he adds. “The base rate can’t get much lower and will have to rise in the future – the question is, when?”



If you are tempted by the attractive headline rates on longer-term fixed deals, then there are several factors to consider.

First of all, you should never consider locking away your money for a long period of time if you think you might need access to is within that period. Many fixed rate savings account do not allow any early access, and those that do often charge you a penalty for making a withdrawal.

You own view of how base rate might shift in the future is also important. Michael Slade, spokeswoman at data provider Moneyfacts, says savers need to remember that savings – like other forms of investment – is to some extent a gamble.

“No one knows exactly what the future holds for the base rate of the savings market,” she adds. “On one hand, people who want the security of knowing exactly how much interest they will earn on their money might be tempted by three, four or five-year deals. On the other hand, they could lose out down the line if rates on new deals increase.

Black adds: “Sentiment about the base rate can change very quickly – personally, I wouldn’t go for a longer-term fixed deal at the moment. But I could be wrong.”

Opting for a shorter-term fixed deal – such as a 12-month or two-year bond – instead might be more worthwhile, says Matt Hunter, head of personal finance at

“There isn’t a massive difference between the rates of four and five-year account and those fixed for one or two years,” he explains. “Taking a slight reduction in rate might pay off down the line.”

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