Fixed-rate bonds explained: when could fixing your savings make sense?

Fixing your savings can make sense when you have a lump sum of money you’re able to store away for an extended period of time. Fixed-term savings accounts generally only allow a single lump sum deposit and are governed by access restrictions that limit access to your saved funds until the bond matures. However, they also come with the advantage of offering a consistent interest rate for the entire duration of the bond term. In this way, balancing the term length that suits you best against a competitive interest rate can provide attractive compound interest earnings.

Fixed-rate bonds explained

Fixed-rate bonds are savings accounts that trade accessibility for a consistent interest rate. They allow you to lock your money away for an agreed period of time, during which the interest rate on your savings won’t change. This means your compound interest earnings would be more consistent than in a savings account governed by a variable interest rate. However, you’re usually not able to withdraw your savings until ‘bond maturity’, when the term ends.

How should you compare terms and rates?

Fixing your savings can make sense when you can afford to set aside a lump sum of money for an extended period of time. Most fixed-term bonds will last for anywhere between 6 months and 5 years, allowing you to choose a term length that best suits your future financial goals.

For example, if you have a large, planned purchase in 2 years’ time then a 2-year fixed bond would allow you to earn consistent interest on your savings for that period and then regain full access to them once the bond matures.

Each fixed-rate bond has an interest rate tied to its term, with many of the longer terms offering higher interest rates. If you work out your AER (Annual Equivalent Rate) and then multiply it by the length of your term, you can roughly calculate how much interest you’d earn on your savings across the duration of the term. In this way, you can directly compare how much your savings could grow with each bond.

What happens to access during the fixed term?

Unlike easy access accounts, which generally allow you to withdraw as much money as you like as often as you want, most fixed-term bonds will limit access to your funds throughout the duration of your agreed term. As requesting access to your funds before the bond matures could result in interest penalties from your provider, fixing your savings makes the most sense when you’re setting aside a sum of money you know for sure you won’t need to access for the duration of the term.

What should you check before committing?

Firstly, fixing your savings makes the most sense when you have a sizable lump sum you wish to save, as fixed-term bonds generally only allow for a single lump sum deposit for the duration of the term.

Secondly, these accounts generally have higher minimum deposit limits than standard easy access savings accounts, ranging anywhere from £500 to £5,000. Sometimes the bonds with the most competitive interest rates can be linked to higher minimum deposit amounts.

Lastly, a worthwhile consideration when planning your savings accounts is your FSCS limit, which will protect up to £120,000 of your savings per banking provider. If you’re planning to deposit a larger lump sum than this limit, it could be worth comparing several providers to split your funds and ensure FSCS protection.

When could fixing your savings make sense?

Consider the following:

• Fixed-rate bonds offer the advantage of consistent interest rates, in exchange for limiting access to your funds.
• Many fixed-rate savings accounts also only allow for a single lump sum deposit, meaning you can’t slowly and steadily build up savings but must have a chunk of money ready in order to maximise your interest earnings.
• Since these accounts protect your savings rate from changes in market rates, the consistent interest they can earn make them attractive to savers.
• As a result, fixing your savings makes the most sense when you have a lump sum you can afford to set aside for an extended period without needing to access it.

Frequently asked questions

Is term length or interest rate more important?

Choosing the right bond for you is about balancing both factors, rather than focusing on one or the other. Before you fix, compare which length of time best suits your future financial needs while also choosing a competitive savings rate to ensure strong earnings from interest.

What are the risks of locking in a fixed-rate bond for a long time?

Firstly, it’s worth making sure you will not need your funds for the duration of the bond. If you need to withdraw any money for emergency purposes, you may suffer an interest penalty. The other risk of locking in a long-term bond is that market interest rates could rise above the level you’ve locked in, meaning your savings could be tied to a lower savings rate until bond maturity.

What if I need to access my money before a fixed term is over?

There’s no guarantee a provider will allow you to access your funds before the end of the agreed term. If you want to withdraw funds before the bond matures and it is approved by your provider, be aware that they may charge an interest penalty as a trade-off.

How much can I deposit into a fixed-rate bond?

Fixed-rate bonds are generally governed by higher-than-average minimum deposit limits, ranging from £500 to £5,000. Be aware that these bonds generally also only allow a single lump sum deposit, rather than giving you the option to freely build up a savings pot with flexible payments.

Next steps

If you’re considering your options in trying to choose a fixed-rate bond that will suit your requirements, these Kent Reliance pages may help.

View fixed-rate bonds

View current interest rates

View all savings products

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