If you have savings that you are not going to need in the short-term then one way to make your money grow is to invest in a fixed rate bond. But what does this involve?
What is the difference between a bond and a savings account?
When you invest your money in a bond you are essentially lending it to the bank or building society with the promise that they will pay it back to you on the date the bond matures, along with interest.
A savings account is a secure place to keep your savings. You can add to it and take money out of it as often as you wish (subject to any notice periods or limits that you agreed to when you opened the account). Most savings accounts have a variable rate of interest based on the Bank of England’s base rate, however some have their interest rates fixed for a certain length of time which can be anything from 1 to 5 years.
When can I access my money?
Bonds are intended for long-term savings of lump sums and usually you have no access to your funds until the bond matures. Some bonds do have early withdrawal methods, but this usually comes at the price of some, if not all, of the interest earned while the money was in the bond.
What is the difference between fixed and variable rate bonds?
Although a variable rate bond might have a bigger interest rate now, that rate could vary over the lifetime of the bond. How often the bank varies the rate will be detailed in the terms and conditions.
A fixed rate bond guarantees to pay the amount of interest advertised when the bond matures. You can calculate now how much money you will have at the end of the bond.
What are the best fixed rate bonds?
Generally speaking, the higher the interest rate, the better the bond. Long period bonds, for example lasting 3 years or more, will usually have the highest interest rates. If you can’t wait that long, then 1-year fixed rate bonds are available, and there are also 2 year fixed rate bonds if you can wait just a little bit longer.
For example, at the time of writing Sage Fixed Rate Bonds (3-year term) were being offered at 2.15%AER, whilst most one and two-year term bonds are offering less than 1.8%.
How do I invest in one?
There are many different providers of fixed rate bonds. You can get supermarket bonds too -Tesco Fixed Rate Bonds are available as well as Sainsburys along with some online providers. For banks such as Santander, Fixed Rate Bonds are one of their core products and can be opened as easily as opening a bank account, easier still if you are already one of their customers. Nationwide fixed rate bonds appear to have good interest rates too. Post Office fixed rate bonds are offered by the Bank of Ireland but are still a UK product and subject to UK banking regulations.
Whichever provider you use, make sure to read the terms and conditions carefully before going ahead with any bond, especially if you may want to withdraw your money before the term is up.