With six base rate rises under our belt, it’s no surprise that savings rates have been on the increase, which is great news. But Fixed Rate Bonds have really been going from strength to strength and the best rates on the market are the highest they have been for many years.
What is a Fixed Rate Bond and who is it good for?
As the name suggests, a fixed rate bond is a savings account that you put your cash into for a predetermined period of time and receive a fixed rate of interest for the term.
Most fixed rate bonds don’t allow access at any point until the bond matures, except on death. As a result of this lack of access, fixed rate bonds will normally pay more interest than easy access or notice accounts and are therefore popular with savers and the providers alike.
For the providers, it is valuable for them to know that they have a pot of money that they can lend against, that cannot be redeemed until maturity, so they are often willing to pay for it.
But as a saver, you must be sure that you don’t want access because in most cases you can’t withdraw the money, even with a penalty. It’s simply NO access.
We do find that there will be times when a number of providers are trying to raise money at the same time and this is great news for savers, as it can see fierce battles between them, like the one that has been occurring recently.
Don’t forget Sharia-Compliant Fixed Term Accounts
As well as Fixed Rate Bonds, there are also Sharia-Compliant Fixed Term accounts that should not be overlooked, as these products often pay market leading rates. The only real difference is that these accounts pay an Expected Profit Rate rather than a guaranteed fixed rate.
Islamic banks are founded on faith-based ethical principles that are derived from trade, entrepreneurship and risk-sharing. As money by itself is not considered to be a commodity from which you can profit, no interest is paid or received by Islamic banks. Instead, the providers will partake in Sharia compliant activities with the intention of generating profit, which is then shared.
Although Sharia-compliant savings accounts comply with Islamic law, they are available to any saver, regardless of religion or culture.
As Sharia fixed term accounts pay an Expected Profit Rate (EPR) rather than a fixed interest rate, in order to comply with the strict ethical code of Sharia banking principles, this means that the rate is not guaranteed, although it’s worth noting that to date, the offered EPRs have always been paid on the fixed term accounts, as they are provided with that objective in mind.
And, even if the provider felt that they would be unable to pay the EPR, the providers will offer their customers the option to break the bond, having earned the EPR up to that point.
More importantly however, the providers are fully authorised and regulated in the same way as other banks and building societies and are part of the UK Financial Services Compensation Scheme (FSCS). So, funds of up to £85,000 per person, per provider, are fully protected in the same way as funds deposited with your high street bank.
What’s been happening to Fixed Term savings accounts?
Although savings accounts across the board have been rising due to the multiple increases in the Bank of England base rate, fixed term bonds have seen some really startling increases, especially among the shorter term bonds, where competition has been fierce!
Those who took out a 1-year fixed term account a year ago could have earned a maximum of 1.31% AER - £131 for each £10,000 deposited. Those savers with bonds maturing are likely to be delighted to find that the rate they could earn on a 1-year bond today has more than doubled to 3.10% - that means earning £310 over the next year via the Sharia QIB (UK) 1 year Fixed Term Deposit via the Raisin UK cash platform.*
Over two years, the news is equally as positive. Anyone with a 2-year bond maturing now is in for a nice surprise. If you had opened a 2-year bond in August 2020, the top rate you could have found was 1.30%. If you are looking to roll over that cash for another 2 years, you can earn as much as 3.36% AER with Hampshire Trust Bank.
Believe it or not, those rates in August 2020 and 2021 were not the lowest that fixed term bonds fell to. With the base rate falling in March 2020, and the markets uncertain about when the Bank of England would be able to raise rates again, rates fell off a cliff, falling to as low as 0.58% for the best 1-year bond in February 2021 and just 0.71% for the best 2-year in March 2021. So, with things as they stand at the time of writing, this means that the top 1-year bonds have increased by over 425% - and over 2-years it’s an increase of 372%.
There hasn’t been quite as much action in the longer-term bond tables, although once again the best rates have certainly recovered strongly.
At the time of writing, the best 3-year bond is paying 3.40% (Tandem), up from its low point of 0.88% in February 2021 – so a mere 286% increase, while you can now earn up to 3.55% per annum (Tandem again!) if you are happy to tie your money up for 5-years. In March last year, the best rate was just 1.25%, so 3.50% is a significant improvement and a rate we’ve not seen since December 2012
Long may this continue – although as it is often the case that the battle can cease as suddenly as it started, if you see something attractive, it probably makes sense to crack on and open it, or you could miss out. Check out the Fixed Rate Bond and Sharia Fixed Term Bond best buy tables, to keep up with any changes that may occur after the time of writing.
How long will interest rates continue to rise?
One suggestion that market sentiment regarding the future of interest rates is perhaps changing, is that 10-year gilts yields had fallen from a recent high of 2.65% in June this year, to around 2.02%. However, the inflation figure for the 12 months to July 2022 showing that the Consumer Prices Index (CPI) level has increased to 10.1% (announced by the Office for National Statistics on 17 August) seems to have spooked the market and bond yields have started to rise again.
It is certainly not an exact science but what tends to happen is that gilt yields may rise when the market anticipates an increase in interest rates and vice versa. And the yields of different terms of gilts might behave differently depending on short and long term expectations. For example it could be that short term gilt yields are rising while long term are falling, indicating that interest rates are expected to rise in the short term but fall in the longer term.
What happens if rates continue to rise?
With things changing all the time, there is always the concern that if you lock into a fixed rate bond today, you might be missing out on better rates tomorrow. And that is a risk you may have to take. If you are always waiting to see if something better might come along, while leaving your cash to languish in a poorer paying account in the meantime, then you will always be missing out on earning that little bit more.
One option, to try and hedge your bets, is to split your cash - putting some into fixed term, higher paying accounts now and keeping some aside in an accessible but best paying account to take advantage of the opportunity of higher rates if they come along.
We’ll be keeping an eye on the fixed rate bonds to see how long this activity continues.
*We are occasionally paid by some providers if you click through from our Best Buy Tables and open a savings or current account with them. We will never accept a payment that compromises in any way our independent, whole of market approach to providing information on savings products. For clarity we will indicate those companies who remunerate us with an asterisk (*).
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