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18-month fixed bonds pay more than two-year deals

18-month fixed bonds pay more than two-year deals

Category: Savings
06/09/2018

MONEYFACTS ARCHIVE
This article was correct at the time of publication. It is now over 6 months old so the content may be out of date.

Fixed rate bonds offer savers some of the best interest rates, and it's generally understood that the longer you tie your money up for, the better the rate will be. However, our latest research shows that this may not always be the case, as the average 18-month fixed bond rate is now 0.13% higher than its two-year counterpart.

This goes against all usual convention, but it'll no doubt come as welcome news to those wary of locking their money away for too long, as they'll be able to get a higher rate of interest with less of a commitment. Not only that, but fixed bond rates have been edging up in recent months, too, so it's a win-win!

The table below highlights the changes in more detail. As you can see, although rates remain lower than at this point last year, they're far higher than those recorded in January – and the rate for 18-month deals has surged ahead.

March 2016
January 2017 Today
Average one-year fixed rate 1.34% 0.92% 0.97%
Average 18-month fixed rate 1.52% 1.08% 1.23%
Average two-year fixed rate 1.60% 1.04% 1.10%
Source: Moneyfacts.co.uk

"While many savers assume that opting for a longer-term deal will get them a better rate, it turns out that, in the case of 18-month fixed rate bonds, savers could find themselves better off by choosing this option instead of the longer two-year deal," said Charlotte Nelson, finance expert at Moneyfacts.co.uk.

"The gap between the average 18-month and two-year fixed rate bonds has widened significantly over the past year. For instance, a year ago the average two-year fixed rate beat the 18-month average hands down, but 12 months later the pendulum has swung the other way."

Challenger impact

As Charlotte explains, this is largely due to the fact that the majority of 18-month fixed rate bonds are provided by challenger banks. These newer brands have stepped up the competition recently as they need to build up their presence in the market and still need savers' cash; the only way to get those deposits is to offer higher rates.

As a result, they now offer some of the best bond rates in the market, "and the addition of an 18-month product is just another way they can distinguish themselves from the competition," said Charlotte.

These 18-month deals particularly stand out when you compare them to the offerings of main banks – you only need to look at our fixed rate Best Buys to see a distinct lack of big names in there, with the majority of chart positions taken up by smaller brands.

To illustrate, the average two-year bond rate from main banks (the biggest providers on the market i.e. Bank of Scotland, Barclays, Halifax, HSBC, Lloyds Bank, Nationwide Building Society, NatWest, Royal Bank of Scotland and Santander) stands at just 0.65% today – which means you could be a staggering 0.58% better off, on average, by opting for a bond six months shorter.

"18-month bonds represent a small sector of the fixed rate market, but savers now need to look past the traditional terms to get the best possible deal for their investment," concluded Charlotte. "The fact that rates have begun rising (albeit in small increments) could deter people from investing over the longer term, so an 18-month bond might be just what they are looking for."

What next?

Compare the best fixed rate bonds

Disclaimer: Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at any time.

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