Savers are being warned against locking away their money as they can often get a better rate with an easy-access account.
It used to be the case that the longer you tied up your cash, the higher the interest rate. But banks and building societies are now slashing rates on longer-term deals.
It means the gap between what you can earn with a one-year fixed account and a three- or even five-year deal has narrowed to nearly nothing. And in some cases, you can earn more interest by foregoing fixed rate deals in favour of an easy-access account.
Should you lock away your cash? Some easy access accounts now pay more than fixed deals following banks slashing fixed rates in recent months
Kevin Mountford, chief executive of savings platform Raisin, which offers fixed rate bonds, says: ‘I don’t see why anyone would go for any term of more than one year. Now that the difference between one-year and longer-term bonds has fallen, there is a disincentive for people to lock their money away.’
Skipton BS’s new fixed-rate bonds pay 1.3 per cent on up to £20,000 for all terms between one and five years. For larger sums the rate is just 1.4 per cent. Aldermore Bank and Santander pay an extra 0.05 per cent if you tie your money up for two years rather than one, giving you an extra £5 annual interest on a £10,000 sum.
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They pay 1.75 per cent and 0.5 per cent respectively for one year and 1.8 per cent and 0.55 per cent for two.
Shawbrook Bank, often among the top payers, offers 1.75 per cent for two years.
This is just 0.1 percentage points more than its one-year deal paying 1.65 per cent — or £10 extra interest a year on each £10,000.
Some providers are even paying higher rates of interest on accounts which give you easy access to your money than fixed deals.
Yorkshire BS pays 1.25 per cent on its one-year bond and 1.35 per cent on its three-year deal. And you cannot touch your money during the term. Meanwhile, the society pays a higher variable 1.4 per cent rate on its One-Year Limited Access Saver, which lets you make as many withdrawals as you like on one day a year.
Principality BS pays 1.43 per cent on its easy-access Online Saver and just 1.33 per cent on its one-year fixed rate bond. AA Savings pays 1.21 per cent on its easy-access Member Saver and 1.2 per cent on its fixed rate bond.
Virgin Money pays 1.5 per cent on its three-year fixed rate bond, with no withdrawals permitted. This is the same rate it pays on its variable-rate Double Take E-Saver which lets you take out money twice a year.
James Blower, founder of Savings Guru, says: ‘Rates on two- to five-year bonds have dropped as interest rates are forecast to fall, rather than rise, over the longer term. There is huge price competition in the mortgage market which lenders are funding by offering easy-access and short-term bonds rather than more expensive longer-term ones.’
At the start of this year the top two-year rate was 2.35 per cent with Aldermore Bank. Now it’s 2.05 per cent from Masthaven Bank, a 0.25 percentage point drop. Three-year bonds have seen similar falls, while the top five-year rate is down from 2.7 per cent to 2.4 per cent.
Barclays hits savers’ rates
Barclays is the latest big bank to cut rates for loyal savers.
Its Instant Cash Isa rate will fall by 0.2 percentage points from October 9. If you have a balance of less than £30,000 your new rate will be 0.4 per cent. Those with £30,000-£100,000 will get 0.45 per cent more. Higher balances will earn 0.55 per cent.
It means savers are earning less now the Bank of England base rate is 0.75 per cent compared to when it stood at a lower 0.5 per cent. Then, Barclays paid from 0.55 per cent-0.75 per cent.
TSB rates will fall next month. On September 10, savers in its Easy Saver, eSavings and Cash Isa Saver will earn 0.15 per cent.
Nationwide cut rates on some accounts to 0.1 per cent this month.