What to consider before choosing a fixed-rate bond?

Fixed-rate bonds offer the benefit of consistent interest rates, though they also lock withdrawal access for the duration of their agreed term. As a result, it can be helpful to consider your future financial plans to ensure you pick the term length that best aligns with when you’ll next need access to your savings.

How does a fixed-rate bond work?

A fixed-rate bond locks your funds away for an agreed period of time, during which they earn a consistent rate of interest. During this time, you generally can’t withdraw your money except at the discretion of your banking provider. These accounts can benefit from more competitive interest rates than easy access or notice accounts, as those accounts typically have variable interest rates.

How should you compare terms and rates?

Before choosing a fixed-rate bond, it can be helpful to compare which terms and rates best suit your needs. Most fixed-rate bonds offer term lengths ranging from 6 months to 5 years, generally offering more attractive interest rates in line with longer fixed terms.

While these high rates can be attractive, it may be beneficial to consider what your future plans for your savings look like. If, for example, you might be planning to put some of your savings towards a house deposit within the next 2 years, then it may be best to avoid agreeing to a fixed term that lasts longer than that period.

What happens to access during the fixed term?

During a fixed term, access to your savings is generally completely restricted. Fixed-term bonds usually offer a grace period of a week or two once your account has been opened, during which you can make any last-minute changes. However, once the fixed term begins, you’ll be unable to withdraw your funds until the bond reaches maturity.

Fixed-rate bonds don’t guarantee a customer any right to withdraw their money before bond maturity, however providers reserve the discretionary right to allow access if requested. Access is sometimes granted during emergency circumstances; however, pre-maturity withdrawals may incur interest penalties.

What should you check before committing?

Before committing to a fixed-rate bond, it can be beneficial to carefully review your future financial plans and ensure you’re choosing the right term length that allows you to access your money when you next need it.

As fixed-term bonds often dictate a single lump sum deposit, rather than free deposits throughout their duration, it can also prove helpful to ensure you have funds available in a separate savings account in case of emergencies, as you’ll most likely be unable to access savings in a fixed-rate bond before maturity.

What to consider before choosing a fixed-rate bond

Before choosing a fixed-rate bond, it can be helpful to consider the following:

• Fixed-rate bonds offer the benefit of a consistent interest rate across the full length of their agreed term.
• Fixed-rate bonds do, however, have a trade-off of limiting access to funds for the duration of their term, until it reaches maturity.
• Any requests made to access funds before bond maturity fall under the discretion of your provider and may incur a charge on your deposit or interest penalty.
• While choosing an account with a competitive interest rate is always attractive, carefully considering which term length best aligns with your future financial plans is just as beneficial.

Frequently asked questions

What is a fixed-rate bond and how does it work?

Fixed-rate bonds are a type of savings account which lock your money away, restricting access for an agreed period, during which it earns a consistent rate of interest.

Can you withdraw money from a fixed-rate bond before the term ends?

Fixed-rate accounts generally don’t grant customers any right to withdraw funds before their term ends. As a result, all requests to withdraw money before bond maturity fall to the discretion of the provider and can potentially incur financial penalties on the account.

What happens when a fixed-rate bond matures?

A provider will notify you anywhere from 2-4 weeks before bond maturity, allowing you to choose what happens next to your savings. If you do nothing, your funds will usually automatically be transferred to a holding account.

How long should I fix my savings for?

This depends on your future financial plans. To decide how long you should fix your savings for, carefully consider any large upcoming payments or purchases over the next few years to see when you might next need your savings.

Is a fixed-rate bond suitable if I might need access to my money?

Given a fixed-rate bond locks away access to your money for the duration of the term, it’s not always preferable if you feel you’d need access prior to the end of an agreed term. Easy access or notice accounts might offer a more attractive compromise of interest and flexibility.

What happens if interest rates rise after I open a fixed-rate bond?

You’re tied into the consistent interest rate that was agreed until the end of the fixed term. Because of this, long term bonds such as five-year terms aren’t always as attractive as their higher interest rates appear, as the base rate may rise above what’s on offer when you first agree the term.

Is the interest on a fixed-rate bond taxable?

ISAs can come in fixed-rate varieties, meaning you can potentially earn tax-free* interest on a fixed-rate ISA bond. All other types of fixed-rate bonds are subject to the standard PSA tax rules.

Next steps

If you’re wondering what to consider before choosing a fixed-rate bond, the following articles can help offer further helpful information:

View fixed rate bonds

View current interest rates

View all savings products

^*Tax treatment depends on an individual’s circumstances and may be subject to change in the future.

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