Taking advantage of an introductory bonus rate, although temporary, can add a big boost to your savings. We show you how you can make your money work harder by making the most of these rates.
What are introductory bonus rates?
Nowadays many savings accounts temporarily boost their rates with an introductory bonus. This means that for a limited time (usually 6 months to a year) you will earn an elevated rate of interest on your savings.
Banks offer these higher rates of interest to lure in new customers, hoping that you will keep your savings with them even after the introductory bonus period has expired.
These higher rates of interest can be extremely competitive and accounts that offer these can provide a great place to save your money. However as these rates are only temporary, they should only be seen as a short-term home for your savings unless the provider’s standard rate of interest is also competitive.
This is because after the introductory offer ends, the rate paid on your savings will revert to your provider’s standard rate – and as well as usually being considerably less than the bonus rate you enjoyed at the opening of your account, it’s likely this will also be variable. This means it could sink even lower at the whim of your provider, making the return on your savings negligible at best.
What makes introductory bonuses worthwhile?
Savings accounts with introductory bonus rates can be extremely worthwhile as they mean you will be earning a high amount of interest on your savings for a few months to a year. This means your money is working as hard as it can and earning plenty of interest just by sitting in one account.
When an introductory rate is in place on a savings account it will often be higher than the rate of an account without one, and so can offer a truly effective boost to your savings - even if only for a few months.
When looking for a home for your savings, you should always remember to compare AERs and gross rates of the accounts you are interested in.
What does AER mean?
The AER is the Annual Equivalent Rate on your savings, meaning that it shows you how much interest your money would earn if you deposited it in an account and left it there for a year, and interest was paid on the balance monthly. If interest is paid monthly, you'd be earning interest on this interest over the year. This is what the AER covers.
In this way the AER differs from the gross rate, because the gross is simply the flat rate that would be paid over the year, without taking into account interest earned on monthly interest.
However if interest is paid on your money annually instead of monthly, the AER and gross will be the same, because there won't be any additional interest earned on monthly interest.
How does this apply to bonus interest rates?
A bonus interest rate adds a new dimension to this scenario. If a bonus rate is paid for, say, 6 months upon opening your account, the AER will be less than the gross rate because it has less time to accumulate (6 months instead of a year). So if you're intending to switch accounts when a 6 month bonus rate ends, the AER will be irrelevant to you as it would only apply if you were keeping your money in that account for an entire year.
This means that if you know you will be moving your money after a bonus period of less than a year ends, it will be best to look at the gross rate. But if you'll be keeping your money in the account for a year or more and earning interest monthly, the AER is the figure to look out for.
How can I best use introductory bonuses to my advantage?
Savings accounts that boost their offering with an introductory bonus can be used to your advantage as long as you remember that the elevated rates are only temporary. As the rate will drop to your bank’s standard AER after the bonus period ends, you’ll only really be able to gain if you remember to switch to a new competitive rate after the bonus period is over.
This means keeping an eye on the other different savings accounts available while your money is enjoying its temporary bonus rate. Look out for accounts that offer similarly decent opening rates so that when your savings meet the end of their bonus period, you know where to move your money next.
This can effectively become a game of jumping from one bonus offer to the next, and if you are up to the challenge of moving on every time one offer ends, this can be very beneficial to your savings.
However if you don’t feel cut out for constantly moving your savings to the next best thing, you may be better off finding a more stable savings account. Although rates on these accounts may not be ‘headline-grabbing’, they can offer a consistently competitive rate of interest that lasts longer than an introductory bonus would.
What do I need to watch out for?
Some accounts with high introductory rates have penalties in place if you withdraw money from your savings before the bonus period is up. The penalty may mean that you forego the high rate of interest and revert to the standard APR, or in some cases you could be charged for withdrawing early. Therefore it is important to look into the terms and conditions and check that you are happy with them before opening an account.
It’s also important to remember that if you are switching your savings from one account to a bonus rate account, you may lose interest if your money is in limbo between the 2 accounts. So check beforehand that you will be able to transfer your money quickly from one account to the other to make sure you don't lose out on interest.
Introductory bonuses on savings accounts can really benefit your money, by giving it a boost with a high interest rate. If you have the time and patience to stay on the ball and keep moving your money when these offers end, it’s possible to earn a decent return on your nest egg indefinitely.
