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Is now the time to fix your savings rate?

Is now the time to fix your savings rate?

Category: Savings

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 It is now over 6 months old so the content may be out of date.

If there's been one thing that's been consistent over the past few years, it's that interest rate predictions have been consistently wrong!

Since the Bank of England cut base rate to 0.5% in March 2009, all talk has been about when rates will go up and by how much. But up to now, the turbulent path of the economic crisis has confounded the best attempts of the forecasters.

Recently though, speculation has been building that we might actually see an interest rate decrease before we see a rise.

Capital Economics predicted in July that the Bank would slash Base Rate to 0.25% in November. And with the UK struggling to haul itself out of recession, this forecast has gained more credence.

So if it looks like rates are going to go down, the argument could be made that now is be the perfect time to fix your savings rate. However, it's not quite as simple as that...

Fixed savings bond rates are trending downwards

Average rates on fixed savings bonds are trending downwards compared to this time last year.

Average fixed savings bond rates

Sep 11Sep 12
1 Year2.79%2.64%
2 Year3.34%3.17%
3 Year3.53%3.26%

Recently one year fixed rate bonds have seen a fall in the top Best Buy rates on offer. Whereas just a couple of months ago the top 1 year fixed rate bond was 3.60%, today the best any bank or building society can muster is 3.35% (from Bank of London and the Middle East).

It's true that the closer we get to any prospective rate cut, the more Best Buy rates will be pulled. So it would appear that the market could be making a judgment that the Bank of England will cut rates.

Top fixed rate bond and ISA rates

Here are the best fixed rate bond and ISA rates currently on offer:

1 Year

Bank of London and the Middle East

Metro Bank
2 Year3.75%
Bank of London and the Middle East
3 Year4.00%
Bank of London and the Middle East
4 Year4.20%
State Bank of India
5 Year4.60%
Bank of London and the Middle East
Rates correct as at 28.9.12.

Should you put your savings in a fixed rate bond?

To fix, or not to fix: that is the question. Ultimately it depends on:

  • your view on the latest rate predictions (Do you think rates will go down? When do you think they will increase once more?)
  • how much access you need to your cash

Often, particularly with shorter term bonds, you won't be able to access your cash until the end of the bond's term. Where you can access your money, it will normally be at the expense of a sizeable chunk of interest.

So at the end of the day, if you need easy access to your savings, there's no point opting for a fixed rate account.

Fixed rates bonds have the unique advantage of paying you a guaranteed amount of interest over a set term. Unlike variable rate accounts that could see diminishing rates in the event of a Base Rate cut, fixed rates offer certainty. The flipside is that if rates don't fall over the term of your bond, and actually increase, you could be sitting on a pretty uncompetitive rate that is expensive, or impossible to get out of.

What next?

Compare 1 year fixed rate bonds
Compare 2 year fixed rate bonds
Compare 3 year fixed rate bonds
Compare 4 & 5 year fixed rate bonds
Compare easy access savings accounts
Compare cash ISAs

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.