If you are looking for somewhere to save money, you may wonder whether a fixed rate bond will be a good idea. These are a specific type of savings account and it is good to understand how they work so that can make a decision as to whether they will be the right sort of account for you.
What is a Fixed Rate Bond?
With this savings account you will normally have a maximum (and sometimes minimum) amount to pay into the account. You will get a fixed rate of interest for a certain time period and will have to keep your money in it for that time period to get the interest. It will usually last for a year or number of years, potentially up to five. Sometimes you will be allowed to withdraw your money early with a penalty – which will mean not getting all the interest your earned, but sometimes you will not be able to withdraw any money at all. It is important to check the terms on this if this is something which could be a problem for you.
What are the Advantages?
- The interest rate tends to be higher on these types of accounts compared with instant access savings accounts, which means that you will get a much bigger return for your money.
- The interest rate is fixed, do if general rates go down, you will still be paid at the higher rate.
- As the money will be tied up, it will be difficult for you to withdraw it. This means that you will not be able to be tempted to spend it and therefore you will keep hold of it. This means it will be great if you are saving up for something.
What are the Disadvantages?
- You will need to pay in a lump sum of money, so if you want to save in small amount regularly, then this account will not be right for you.
- The money will be tied up, or if you can get it out you will have a penalty. This means that it is only really suitable for money that you know that you will not need to access.
- The interest rates are fixed so if rates go up generally you will not be able to take advantage of this.
Therefore, you will need to have a think about whether this sort of account will work for you. You will need a lump sum of money that you know you will not need to spend for at least a year. Therefore, you may need to think about whether this is a good idea or whether you might need that money to fall back on. Of course, you may have a lot of savings and be happy to have some in an instant access account and the rest tied up in a bond. If you do not have loads of savings then you may not be wise in taking out a bond.
If you do decide on a bond then you need to think about how long you want the money to be tied up in it. You will find that there will be a number of bonds available with different banks or building societies and it is worth comparing them. Look at the different interest rates as well as how long you need to have the money in the bonds and decide whether you feel it will be better to get a shorter one such as one year or one that lasts longer. Consider what might happen in the future and what money you might need to have available to you. Also make sure that you compare the interest rates and think about whether the higher interest ones will offer you good value for money.