What is a fixed rate bond?

Fixed rate bonds, explained 

Fixed rate bonds are a type of savings account where you lock your money away for a set time, usually between one and five years. In return, you get a fixed interest rate. This rate won’t change during the term of the bond, so you’ll know exactly how much you’ll make on your savings. 

Fixed rate bonds are a popular choice for savers who are looking for a safe and secure way to grow their money. They can also be useful if you’re saving up for something specific and often longer term, like a holiday, wedding or house deposit. 

Plus, depending on the provider, you might earn interest monthly, quarterly or annually. 

Unlike an easy access savings account, withdrawing money from a fixed rate bond early will mean losing your interest. Some providers will only allow you to access your money in an emergency, and you may be charged a breakage fee. That’s why it’s important to make sure you don’t need to dip into your savings before opening this type of account. 

At the end of the term, which is when the bond matures, you’ll be able to withdraw your initial savings plus the interest you’ve earned. So, if you don’t need access to the money right away, a fixed rate bond could help you stick to your savings plan. 

How do fixed rate bonds work? 

Here’s how fixed rate bonds typically work:

1. Choose your bond 

Compare different providers, the interest rates available and the length of the bond term. While longer terms often come with better interest rates, this can vary by provider. Always review the terms carefully before committing.

2. Deposit your money 

You’ll need to pay in a lump sum when you open the account. Providers usually ask for a single deposit from a minimum of £500. You usually won’t be able to pay in more later. 

3. Watch your money grow 

You’ll earn guaranteed interest on your savings. The interest rate stays the same for the entire term, so you know exactly how much you’ll earn. 

4. Withdraw your money plus interest 

When the term ends, you can withdraw your money back in full along with the interest you’ve earned.  

What are the benefits of a fixed rate bond? 

Fixed rate bonds come with many advantages for savers. Here’s why they could work for you: 

1. Guaranteed returns 

With a fixed term interest rate, you’ll always know exactly how much money you’ll have at the end of the term. 

Great for: People who want to have peace of mind and no surprises. 

2.  Higher interest rates 

Fixed rate bonds usually offer higher interest than instant access savings accounts. Longer terms also often mean better rates. But this can vary depending on the provider, so it’s worth comparing different accounts.

Great for: People who want their money to grow and don’t need to dip into their savings. 

3. Low risk 

Your savings are safe because fixed rate bonds aren’t affected by changes in interest rates. Plus, if you open a bond with a UK provider, your savings (up to £85,000 per person, per provider) are protected by the Financial Services Compensation Scheme (FSCS). 

Great for: People who want a stable and secure way to save. 

4. Helps you save for a goal 

Locking your money away can make it easier to save for big goals, like a holiday, wedding or house deposit. 

Great for: People who want to stay focused on reaching financial goals. 

5. Helps you stick to your savings plans 

Since you can’t access your money early without penalties or losing your interest rate, fixed rate bonds can help you stop spending your savings too soon. 

Great for: People who want to stay on track with their saving.  

Things to consider before opening a fixed rate bond 

While fixed rate bonds can be a good option for savers, it’s worth weighing up the limitations too: 

1. Your money is locked in 

You won’t be able to access your savings until the end of the term. Think you’ll need the money sooner? A more flexible account might work better for you.

2. You can usually only make one deposit 

Most fixed rate bonds don’t let you top up after your first deposit. So, make sure you’re happy with the amount you’re investing from the start.

3. No early withdrawals 

Taking your money out early usually isn’t allowed. If it is, you might lose some or all of the interest you’ve earned.

Fixed rate bond checklist 

Here’s what to look for when choosing a fixed rate bond: 

• Interest rate: Remember, the higher the rate, the more money you’ll earn 

• Term length: Think about how long you’re happy to lock away your money for. If you might need it sooner, a shorter term, such as one or two years, might be a better option 

• Minimum deposit: Check how much money you need to open the account. Some providers ask for £500, while others may require more 

• Provider reputation: Choose a bank or building society you trust, with good reviews and customer service 

• Flexibility: Most fixed rate bonds don’t let you take out money early. If you need to, easy access savings accounts might be a better fit for you 

How to make the most of a fixed rate bond 

Planning to open a fixed rate bond? It’s important to plan ahead and only put away money you won’t need during the term. If you’re thinking about opening more than one fixed rate bond, you might also want to choose bonds with different end dates. This could mean you’re able to access some of your savings as each bond matures, while the rest continues to grow. 

Most providers will contact you before your bond matures. You can then decide whether to withdraw your savings, reinvest them or move them elsewhere. If interest rates have risen, reinvesting in a new bond could help you earn even more.

Before you go ahead, check that a fixed rate bond is the right choice for you. Compare options, think about how long you can lock your money away and consider your savings goals. Research carefully to find the best savings account that suits you best. 

Key takeaways 

• A fixed rate bond is a type of savings accounts that you can put money in for a set amount of time, typically between one to five years. The interest rate is fixed, giving you a clear idea of how much interest your savings will earn. You can withdraw your money, plus the interest, at the end of the term. But withdrawing money early will usually result in penalties or losing your interest rate 

• Fixed rate bonds can offer higher interest rates than some early access savings accounts, but this can vary by provider so always review terms carefully. They can be a safe, secure way to grow your money, especially if you’re saving up for something big like a wedding or house deposit. Locking your money away for a set time can also help you stick to your savings goals

• Compare different providers to find the best fixed rate bond for you. Look at the terms, interest rates and any penalties for early withdrawals to make sure it meets your needs. Remember, if you think need you might need to dip into your savings, then other types of savings accounts could be a better fit for you