If you're looking to save your money in a fixed-rate account, is it better to go with a rate that stays fixed in the long-term or the short? We weigh up your options.
At times when interest rates are at a historic low, it’s hard to know where you should put your savings to maximise their return.
Saving in a fixed-rate account (often referred to as a fixed rate bond) is one option, as it guarantees that the rate paid on your savings will stay the same for a certain amount of time. Fixed rate accounts generally give you the chance to leave your money to accrue interest at a set rate for anything from 1 to 5 years.
You’ll have the choice of getting an account with a fixed rate that will last long term, i.e. up to 5 years, or short-term, around a year or so. But which will make your savings work harder and leave you better off? We discuss the advantages and disadvantages of the two.
Why get a short term fix?
Opting for a relatively short-term fixed rate savings account will give you all the benefits of knowing your savings will be earning interest at a decent rate for a year or two but also the reassurance that they won’t be tied up for too long. This means that after the fixed term has ended, you’ll be free to take your money elsewhere should better rates have become available in the meantime.
Due to the restrictions and penalties that most fixed rate account providers place on withdrawals or mid-term account closures it’s unlikely that you’ll be able to access your money during the fixed term period. So a short term account may be better for you if you can comfortably tie up your savings for a set period of time in return for a better rate, but want the flexibility to be able to access your money in the shorter term – whether because of rises in interest rates or in case you need it for something else.
Fixed rate accounts with shorter terms tend to have lower rates than if you fixed for the long term. However, the majority do still offer far better returns than that available on an instant access savings account – plus you get the reassurance of a fixed rate of interest.
It’s worth being aware that most fixed rate accounts will drop the rate paid on your savings considerably when the fixed term comes to an end. For this reason you’ll need to move your money to a more profitable home as soon as possible in order to keep your savings working hard. As such, if you opt to fix your savings for a shorter term, you’ll need to remember to shop around more frequently than if you had fixed for longer.
This can be a good thing as you’ll be able to take advantage of increases in savings rates if they occur. On the other hand rates could equally drop, which is what you’ll need to weigh up when making your decision as to how long you’ll fix for.
Why get a long term fix?
By opting for a savings account that fixes the rate on your savings for a longer term, you will help to protect your money against any future drops in interest rates for anything up to 5 years. This can provide real security and peace of mind that your savings will be earning a decent return, as they will be safely ticking over on a set rate, whatever happens in the market.
Long term fixed rate accounts tend to offer higher returns than those available on short term fixed rate accounts, so this can definitely make them seem like an attractive option. This is generally because the longer you keep your money with a particular bank or building society, the more they will be willing to pay you in interest as an incentive.
To save your money in a long term fixed account you’ll have to be prepared to tie your money up without access for a number of years, earning the same steady rate of interest throughout that time. You’ll also need to check the terms and condition before you open the account, as many won’t permit any withdrawals or closures during the account term; others will apply hefty interest penalties if you need to access your money.
One of the main points to consider if you are thinking of opting for a fixed rate account with a longer term is that although it will be protected against possible rate drops during the term, you could also miss out on potential rate rises in the future. In an economic climate where interest rates are dragging their feet, it’s plausible to think that at some point in the future rates will have to rise again – the only question is when.
By locking your money away on a long term fix you’ll be taking the risk that at any point during that term rates could rise and you won’t be able to take advantage of them. This drawback however could reasonably be outweighed by the fact that for the duration of the term you’ll have the reassurance of knowing your money will be earning a reasonable and guaranteed return.
Ultimately you’ll have to decide whether you would prefer to fix your savings at the most competitive rate you can find at the moment for a number of years, or hope that rates will rise again in the near future, and opt to fix for a short time only.
Of course if you don’t want to fix your rate at all you can always consider saving in an instant access or regular savings account instead. These kinds of accounts are likely to be a better option for those who need access to their money on a shorter timescale.
Remember too that however long you fix your rate for, at the end of the term you should always check what your rate will revert to - and then move your savings to a new more competitive home when the account is no longer profitable.
