Fixed rate bonds are one of the most popular products in the savings market and one of the most hotly contested amongst providers, with competition and jostling for position in the best buy tables all commonplace.
The main reason for this, is the rise to prominence over the last few years of the so-called challenger banks, newer names that are pushing interest rates back in the right direction and taking business from the more established high street names. They are an excellent option for these banks as they can attract deposits in and know exactly how long the funds will remain with them. This allows the bank to fund its lending activities more effectively, where deposits are relied upon far more than many of the larger banks and building societies.
As a result, many providers on our best buy tables may be unfamiliar. But if you check if they are covered by the Financial Services Compensation Scheme (FSCS) or equivalent, there’s no reason not to consider these new names, especially if you keep deposits within the protection limit of £85,000 per person, per banking licence.
For a full list of which providers are part of the FSCS or equivalent – click here for our handy FSCS Guide.
On the face of it, these accounts can be fairly straightforward: In exchange for a higher rate of interest that is fixed, savers agree to be locked into the account for the term. However, there are a whole host of terms and conditions to watch out for, which can vary widely between providers. Here’s a flavour of some of the key things to watch out for.
Now you see it……
Perhaps a by-product of increased competition amongst fixed rate bonds is the fact that accounts can be withdrawn from sale with no warning, particularly the most competitive. You can keep on top of the latest changes in the savings market by signing up to our free Rate Alert service, where we send you regular updates on the latest new and interesting accounts.
Many providers simply do not allow any access to the funds within the fixed term, except on death, although there are some that do, albeit usually with a hefty penalty for doing so. For example, Kent Reliance will allow withdrawals from its 1 year fixed rate bond, subject to a penalty equivalent to 180 days’ interest on the amount withdrawn. Even more rare is the option to access a portion of the funds deposited without penalty, as is the case with selected fixed rate bonds from Leeds Building Society. The provider’s 1 year bond gives savers the option to access up to 50% of the original deposit without notice or penalty.
Sharia compliant accounts
Another type of cash savings account, which works in a similar way to a fixed rate bond is the Sharia compliant fixed term deposits, which comply with Islamic law but are available to any saver, regardless of religion or culture. Sharia law states that money had no intrinsic value, so neither party can profit from an exchange of money, therefore the payment and receipt of interest is forbidden. Instead, Sharia compliant accounts pay an 'Expected Profit Rate' as an alternative to interest, which is the level of profit paid by the provider to the saver. The provider invests the money deposited by savers to generate a profit, so there is an inherent risk to the return involved, as it depends on the performance of the investments made by the provider. Having said that, providers are keen to state that Expected Profit Rates are usually achieved and most providers allow you to take funds away early if the Expected Profit Rate is not likely to be achieved. For more information, please click here for our Sharia Accounts Best Buy Table.
Is it a savings account?
Whilst a bit different, the above accounts are still cash savings accounts, however it is important to be clear that you are signing up to what you think you are, as there are a number of investments on the market that are presented as an alternative to savings, offering fixed returns and using the term ‘bond’, leading to confusion for some. That is not to say that these alternatives aren’t worth considering, if you are happy with the risks involved. The key is to ensure that if you are after a cash fixed rate bond, that is what you are getting. If you have any doubts, please get in touch and we would be happy to help or refer to our Fixed Rate Bond Best Buy Table, which contains only cash savings accounts.
Bearing in mind that often with this type of account you are unable to access your funds within the term, some providers will give you a ‘cooling-off’ period, typically 14 days, in which to change your mind and have your funds returned to you. However, this is by no means the case with every provider, so check carefully before proceeding.
It is also important to bear in mind timing when it comes to paying in your funds. Some providers insist on a single payment on application. Others allow a set number of days from application to pay in your funds, for example 7 or 14 days. Sometimes this can only be a one-off payment, whilst in other cases providers may allow multiple payments within the deadline.
Regular interest payments
If you are looking for a regular monthly interest payment from your fixed rate bond, be warned – not all providers will allow this. Opting for a monthly interest payment is not a standard option and you will cut down the number of accounts available to you. That said, there are competitive rates on the market and we have a dedicated Monthly Income Best Buy Table to give you a range of options.
Finally, what will happen to your fixed rate bond on maturity? Providers will contact you usually to give you the option of another account or to take the money. However, if you do not tell the provider what you want to do, what happens next will vary. In some cases the funds will be moved into an easy access account, but they may be transferred straight into another fixed rate bond of a similar term, but not necessarily a competitive rate. And with no cooling-off period, this could be a problem. It makes sense to carefully check what happens to your account on maturity and if it does not suit you, look elsewhere.
So, fixed rate bonds are a great option for many savers, however with such a variety of terms and conditions, you need take care before proceeding. If you need any help when considering an account or could benefit from our expertise in looking at the best options for your own particular circumstances, please contact us on 0800 321 3581, we’d love to hear from you.