An Introduction to Fixed-Rate Bonds

Sep 10, 2014   //   by Keith McDonald   //   Savings Guide  //  Comments Off on An Introduction to Fixed-Rate Bonds

A fixed-rate bond is a savings product that returns a set amount of interest over a set period of time. So, for example, if you commit to a 2-year bond offering 2%, you’ll receive this annual rate guaranteed for 2 years.

Bonds are generally available for between 1 year and 5 year terms. The longer you commit your funds, the higher rate of interest you’ll normally receive.

Bonds also have a minimum deposit, which can range from £1 to over £10,000. A higher minimum deposit may be less accessible, but it often leads to higher rates.

Once you’ve committed to a bond, you’re not normally allowed to add to it. If you’re looking for an account that allows you to save every month, it may be worth choosing an alternative, such as a regular saver.

You’re also not usually allowed to access your cash once you’ve locked it away, or you could face a hefty interest penalty.

Some bond providers may offer a small number of penalty-free withdrawals or early access to a percentage of your investment (e.g. 25%), but you’re likely to receive a lower interest rate in return for this measure of flexibility.

So a fixed-rate bond is a calculated gamble, in more ways than one. If you think you may access to your cash during the period it’s locked away, it may be worth choosing a different type of account, or sticking to a shorter term.

There’s also a risk that the longer you lock your funds away, the greater the chance that the fixed rate becomes uncompetitive during that time.

But what you do get with a bond is a guaranteed return. And, if we’re honest, there’s no harm in having a little bit of reassurance that you know what you’re getting and for how long.

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