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Fixed rate bonds

Tamires Criscio
Tamires Criscio
  | Edited by Tom Church
Updated 21st October 2021

Latest Deals is here to help you understand what fixed rate bonds are.

What are fixed rate bonds?

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Fixed rate bonds are a type of savings account. 

This type of savings account offers a fixed interest rate for a set period of time. 

During this period, you can't access your funds and the bank or building society with which you hold the account can't change the interest rate. Also, with this type of account, usually, you can only make one deposit. 

IMPORTANT NOTE: The period of time that you will set your fixed rate bonds is also called the term. 

What are the fixed rate bonds terms available?

Usually, you can find fixed rate bonds terms ranging from six months to five years. Some banks or building societies might offer ten year fixed rate bonds. The most common ones are one year, two years and three years. 

Before opening a fixed rate bonds account, you need to decide the best term for you. The longer you leave the money, the higher the interest rate is.

 If you are saving to buy a house, for example, you know you won't be touching the money so soon, so you might prefer a longer term

If you are saving to buy a car, for example, you know that you will need less money than purchasing a house, you might prefer a shorter term

It all depends on what you want to do with your money. 

Why do fixed rate bonds pay higher interest rates?

Fixed rate bonds pay higher interest rates because you don't have easy access to your money like other savings accounts.

With fixed rate bonds, the banks or building societies know how long they will have your funds for, so they can pay more interest. It's a win-win type of situation.

 They usually use these funds to provide loans to their other customers, such as mortgages.

How is interest paid on fixed rate bonds?

Fixed rate bonds can pay interest in two ways: 

Fixed interest

This is not so common, but some fixed rate bonds can pay a fixed interest every month. This means that you'll earn the same amount of interest every month for the bond term. You can use this as extra income, as the interest will be paid separately in another account. This is better when you are saving a bigger amount of money. 

Compounded interest

This is very common, and most fixed rate bonds will pay a compound interest yearly. So every year, you will earn interest on a larger sum of money. This works better if you leave your money for more than one year. And compound interest is much better to make your money grow faster.

How safe are fixed rate bonds?

Fixed rate bonds are very safe because the Financial Services Compensation Scheme (FSCS) protects them. The FSCS guarantees protection against up to £85,000. 

IMPORTANT NOTE: If you plan to save more than £85,000, it's essential to spread your money in other fixed rate bonds accounts with different financial institutions to keep all your money protected. Which financial institution only guarantees protection against up to £85,000. 

Can you add more funds to fixed rate bonds?

Usually, you can only deposit a single lump sum when you open fixed rate bonds. If you are thinking about opening a fixed rate bond, it’s better to have all your money ready to transfer at once. 

How to find the best fixed rate bonds 

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Usually, the best fixed rate bonds are the ones that pay more interest with shorter terms. Then, you know you are making the most of your money. Also, it's essential to keep some of these points in mind: 

  • How long can you leave your money untouched?

With fixed rate bonds, you must leave your money untouched to be paid the total interest amount. Otherwise, you might lose money. Also, the longer you can leave your money, the higher interest you can get paid. 

  • How much is the interest rate? 

The best fixed rate bonds come with higher rates of interest. 

  • How much do you want to save? 

The more money you have to save, the better. Also, some financial institutions offer higher interest rates for accounts with bigger deposits. 

  • How often do you want your interest to be paid out?

The best fixed rate bonds will let you choose whether to have the interest paid monthly or yearly. But keep in mind that you still won't be able to touch the money you initially deposited until the end of the term of your account no matter how the interest is paid.

Important things to remember before opening fixed rate bonds 

  • You need to make sure you won't need the money during the whole account term. 
  • You need to ensure you have access to another savings account, with easier access if you need money. Ideally, you will have at least three months of your income as an Emergency Fund before starting locking your money away. 
  • You need to make sure you will read the small print carefully before opening the account. 
  • You need to ensure that you have the maximum amount of money saved to make the most of the interest rate because they usually only allow one deposit.
  • Fixed rate bonds work both as savings and investments, as you are locking your money away to make more over time due to the interest rates. 

What are the most common fixed rate bonds terms?

The most common fixed rate bonds terms are one year fixed rate bonds, two year fixed rate bonds and three year fixed rate bonds. We have more information about each of them below: 

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One year fixed rate bonds

One year fixed rate bonds won't let you access your money early, so you need to make sure you can commit to the full term. This can be a great short-term savings option.

Why choose a one year fixed rate bond? 

If you know you won't need your money for one year, this is a great option. Challenger banks usually offer the best rates. We have a complete guide about them. 

What are the advantages of a one year fixed rate bond?

A one year fixed rate bond can pay a higher interest rate than most easy access savings accounts, and you won't have to wait too long to access your money. 

Two year fixed rate bonds

Two year fixed rate bonds also won't let you access your money early, so you need to make sure you can commit to the full term. This can be a great medium-term savings option.

Why choose a two year fixed rate bond? 

If you know you won't need your money for the next two years, this is a great option. Challenger banks usually offer the best rates. We have a complete guide about them. 

What are the advantages of a two year fixed rate bond?

A two year fixed rate bond offers better interest rates than a one year fixed bond. 

Three year fixed rate bonds

Three year fixed rate bonds also won't let you access your money early, so you need to make sure you can commit to the full term. This can be a great long-term savings option.

Why choose a three year fixed rate bond? 

If you know you won't need your money for the next three years, this is a great option. Challenger banks usually offer the best rates. We have a complete guide about them. 

What are the advantages of a three year fixed rate bond?

A three year fixed rate bond offers better interest rates than a two year fixed bond. 

Pros and cons of fixed rate bonds

Pros of fixed rate bonds 

  • A guaranteed interest rate for the full term of the bond.
  • Higher interest rates than easy access savings accounts.
  • Higher interest rates for longer terms and bigger deposits. 
  • Minimal risk. 
  • Easy forward planning because you know exactly how much you will get paid at the end of the term (or as monthly interest payments).

Cons of fixed rate bonds 

  • You lose access to your money for the term of your bond (and you might lose money if you try to move the money before the end of your account's term).
  • You're stuck with the same interest rate for the term of your bond (sometimes interest rates might rise, but yours will be the same).
  • Only allows one deposit at the beginning of the account set up.

Fixed rate bonds FAQs

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