Fixed-rate bond savers face rate crash

Posted on: 11 June 2009 by Gareth Hargreaves

Savers who invested in fixed-rate bonds a year ago are in for a big shock when their deals expire.

Those who locked their money into bonds at rates of 7%-plus last year have been shielded from the massive cuts to the Bank of England base rate over the past 12 months.

But they will crash back down to earth with a bang this summer, when deals expire and they are moved to low-paying linked accounts.

These savers can still move to some respectable bonds on the market paying 4%-plus, but typically only for if they agree to lock up cash for two years. Meanwhile, these rates are dramatically lower than the rates they have enjoyed up until now, with some rates dropping by as much as 7.9 percentage points (i.e., 8% to 0.1%).

The best one-year bonds about to expire in the coming weeks include Bradford & Bingley's High Life 2-in-1 Saver Issue 2, with a rate of 8%: on maturity, customers will be moved to the Standard Maturity Account of the bank, now owned by Banco Santander, which pays a meagre rate of 0.1%.

Kevin Mountford, head of banking at moneysupermarket.com, says “It will be interesting to see whether or not these savers look to riskier investments, such as equities backed vehicles, in order to maintain returns. Those that choose to stick with the fixed rate bonds market will find some solace in several two-year fixed rate deals offering over 4%.

“The golden rule for anyone coming to the end of their fixed rate bond deal is to pay attention to the rate they are getting, and switch to a new deal as soon as the interest rate drops off. If they allow their cash to languish in low interest paying accounts, it could cost them hundreds of pounds in lost interest every year.”

Another great deal coming to an end soon is the Internet Fixed Rate Bond from Birmingham Midshires at 7.17%, after maturity money falls into an instant access account at 2.5%.

Nigerian bank FirstSave has a bond maturing soon at 7.1%, which will be converted afterwards into an easy access account at 0.75%.

Nottingham and West Bromwich building societies have deals of 7.1% and 7.05 finishing soon, afterwards they will be worth 0.25% and 2.65%, respectively.

Indian bank ICICI's term deposit account at 7% will also mature soon, after which the rate will fall to a very respectable 3.75%.

Where To Move Your Money

Those looking to take out another one-year bond should look at Bank of Ireland's deal at 4.1%, although some may be worried about the security of the Irish banking system.

Other deals include those from Skipton (3.85%), Saga (3.82%) and ICICI (3.75%).

The highest-paying bonds are in the two-year market, however, including those from Rothschild (4.35%), ICICI (4.35%) and Kent Reliance (4.25%).

If willing to move your current account, you could access a rate of 6% with Abbey and Alliance & Leicester: however, this rate is only available on balances up to £2,500 and falls to 0.1% after one year.

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