In October, UK interest rates were 5%. On Thursday 5 March, another 0.5% point cut slashed them to just 0.5%. The relentless plummeting of interest rates has sliced interest rates massively. One way to boost your rate is to 'fix' your savings, yet you must be prepared to lock your cash away without access to it. Full details plus mortgage & recession briefing below.
What does a Fixed Rate mean?
Most savings accounts are variable, meaning the rate can change both with the Bank of England's Base Rate and as providers change their competitive stance. It's important to regularly monitor your account's rate and if it plummets, ditch and switch. Yet there are some alternatives to monitoring interest rates:
Fixed rate savings give a guaranteed rate for a set period, but you can't take your money out during that time.
Therefore, they're only suitable for those who are happy to lock cash away for the entire term. It is also very important to understand that the longer you fix for, the more you are RISKING the fact that an unpredicatable future means this could be a bad choice. If interest rates were to increase rapidly, you would’ve lost the flexibility to ditch and switch to a better payer. Plus if the savings safety status of the institution changes, it's more difficult get your cash out
Yet currently, that's balanced out because there are some still decent rates available. This is because many lenders are desperate to get hold of your cash. Plus with fixed rates, they get surety they can keep it till a defined time, thus allowing them to plan their lending strategies better.
Will I definitely get this rate?
Apply now and you should get the rate advertised. However, there is always a chance banks that cut the interest on new fixed rate accounts will attempt to shove you onto the new, lower rate. Be very vigilant during the application procedure, and double check the rate before moving cash in (maybe even give them a quick call).
How safe are your savings?
Bank collapse was once easy to dismiss, then the credit crunch and global market turmoil hit. After the calamities hitting Northern Rock, Bradford & Bingley, Icesave and Kaupthing, and that's just in the UK, every sensible saver should ask themselves: “is my money safe?"
The answer is quite simple. Provided your money is in a UK regulated bank or building society account, it's protected under the Financial Services Compensation Scheme (FSCS) and here's the golden rule:
£50,000 per person, per financial institution is guaranteed.
Sadly, this is the simple face of savings safety. The exact rules are more complex, involving how different banks are registered and what counts as a financial institution. Also remember, if you did need to claim compensation, that would likely mean you won't have access to that cash for a few months. For full info read the full Are Your Savings Safe? guide.
How to maximise safety.
The techniques to adopt depend on the amount of cash you want to save.
- Over £50,000. For those with bigger savings, in the unlikely event a bank or building society went bust, don't put more than £50,000 in any one institution; spread it around.
- Very large amounts. For those with very large amounts of savings (for example, a house sale or inheritance), you may need lots of accounts. Even if you've too much to stick to the £50,000 limit for each, the general rule of not having all your eggs in one basket still works.
- Less than £50,000. If you've less than £50,000, there's no problem in terms of protection. Yet if you were to have to claim compensation, this takes time, and meanwhile you wouldn't have access to your cash. Thus it's still worth considering spreading money across more than one institution.
For more info see the how to get 100% safety section of the savings safety guide.
This guide and best buys.
It's impossible to know which bank is in trouble. As well as the UK banks, we've seen great names of world banking like Goldman Sachs and Merrill Lynch hit trouble.
Therefore, the only solution for this site is that we'll report the top rates and explain any 'protection oddities'. So far, world governments have reacted to protect their banks, and no savers have lost money, and it's likely (though not certain) this will continue.
The UK's Top Fixed Rate Savings
The most competitive rates tend to be for shorter terms. This also allows you the flexibility that you're not locked in for too long. In the comparison for the rates below, the top instant access accounts currently pay around 3.5%.
However, there is a way to beat fixed rate accounts. Regular Savers currently pay up to 6% AER, fixed for a year; these let you save up to £250 - £500/month, though you can't put large lump sums in one. Also, the money only moves slowly into the account, affecting how much interest you'll earn. For the top accounts and how to use them best, read Regular Savings Accounts.
Always double check the rate yourself before applying.
All major updates go in the free weekly e-mail.
The Best One Year Fixed Rates
- Julian Hodge 3.7% AER. From £1,000, Postal access.
The top account is Julian Hodge's 1 Year Capital Millenium Bond, paying 3.7% AER on balances over £1,000. The name might sound a bit crazy, like it is a risky investement, but this pays a fixed rate of interest like the other bonds here.
No withdrawals are allowed and the account must be applied for and operated by post. Julian Hodge has the full £50,000 savings safety protection like any UK account, see the full Safe Savings guide for more.
- Post Office 3.7% AER.
Important! NOT protected by UK's safety scheme.
Another fixed rate account from the Post Office (min £500) pays 3.7% AER. However, it is NOT covered by the UK compensation scheme.
Post Office: This is protected by the Irish safety scheme, as Post Office Savings are run by Bank of Ireland. This covers an unlimited amount of savings until 2010. However, if it went bust, you would legally be entirely reliant on Ireland's government for any compensation. For full info, read Are Irish Banks Safe? blog and the foreign banks section of our savings safety guide.
- Northern Rock 3.4% AER. 100% Safety. Post, phone & branch, min. £1.
Government-owned bank Northern Rock, pays 3.4% interest, if you lock the cash away in a 1 Year Fixed Rate Bond until 1 October 2010. You can save from just £1 up to £2 million, and you can access the account in branches, by phone or post.
Like NS&I, Northern Rock is also 100% safe, as it is a nationalised bank. In the slim chance it's sold within the bond's fixed term, the safety could drop back to normal £50,000 level, though it'd be hoped the government would pick wisely about the institution any savings were sold to.
For full details read the 100% safety section of Savings Safety guide.
The Top Long Term Fix with Access
One account's worth considering before you look at the rest, as it offers a decent, though not table topping rate, plus the added bonuses of 100% safety and access to the cash when you need it.
- Fix at up to 4.6%, WITH access and 100% safety! NS&I
The rate you earn depends on how long you save the cashGovernment-owned NS&I's 5 Year Guaranteed Growth Bond pays 4.6% AER fixed for five years (min £500), but has one huge different characteristic to most fixed accounts; you can close the account at any time, by paying a penalty of 90 days' interest.
Don't worry that it's called a Growth Bond; it's actually a simple fixed rate savings account that's taxed. Plus as it's state run, your cash is 100% safe, up to the maximum balance of £1 million.
Here, the get-out clause means you can fix for five years, but still have the option to grab your cash at any point, and have earned a decent interest rate for that time. Provided you keep it in for at least eleven months, you'll beat any instant access rates too.
Here's a quick breakdown of the real interest rate you'll receive if you take out your cash after specific amounts of time...
Actual interest rate if withdraw after...6 months2.3% AER1 year3.5% AER18 months3.8% AER2 years4% AER3 years4.2% AER
Due to a legal quirk, tax will be automatically deducted from the interest earned, which means non-taxpayers will need to claim this back direct from HMRC.
Quick Stats: Rate: 4.6% AER, fixed for 5 years. Min. Deposit: £500 Access: Online, phone, post. 90 days' interest penalty if you close account early.
The Best Two Year Fixed Rates
By saving for a bit longer, the rates available can jump. Always remember that the longer you lock cash away for, the more of a chance there is that rates will rise while your cash is untouchable. Currently, many economists predict rates will stay low into 2010, but after that who knows.
- Birmingham Midshires 4.25% AER. Online from £1, WITH access.
If you want to lock your money away for two years, Birmingham Midshires* Interent Fixed Rate Bond pays 4.25% on balances of £1, up to £10 million. Unusually (and handily), this allows withdrawals at any time, for a penalty of 90 days lost interest.
B Midshires is part of the HBOS group, and as such has the normal Safe Savings protection up to £50,000. However, it means that if you have money in another of the HBOS owned banks (Halifax, Bank of Scotland, The AA, Saga or IF), then you only get one lot of £50k protection between them.
- Principality BS 4.25% AER. Online, Post, Branch & Phone. Min £500.
If you have over £500 to save Principality BS's Two Year Fixed Rate Bond pays 4.25% AER. The account can be accessed online, in branches, by phone or post.
In April 2009, financial strength rating's agency Moodys substantially downgraded a heap of banks and building societies, including Principality (read Building Society Downgrades news) meaning it's more important to be watchful about not going beyond the £50,000 government guarantee. For full info read the Are Your Savings Safe? guide.
- Islamic Bank of Britain 4.5% AER. Online min £5,000.
The highest two year rate is with the Islamic Bank of Britain's Fixed Term account, if you save £5,000. It offers a 'Target Profit Rate' of 4.5% yearly interest; as the bank is Sharia'a (Islamic law) compliant, all interest is banned. Instead the bank invests your cash in 'ethical trading' and aims to get you a 4.5% return.
While its meant to be the equivalent of savings, this does means you're not 100% guaranteed to get the target rate, so there’s a higher risk element. Though in its five year history, the bank hasn't paid less than the advertised rate. However if you have any doubts over this, put your money elsewhere.
Also, it's contractually obliged to immediately inform you if it looks like the rate may not be achieved, at which point the saver can terminate the account and take the profit made up to that point.
Islamic Bank is UK-registered, meaning you get the normal Safe Savings protection up to £50,000.
The Best Three Year Fixed Rates
It's possible to push the rate up even further, by sacrificing access to the cash for longer. Yet here you are taking a bigger gamble on rates staying low for a significant period; if UK interest rates recover between now and 2012, you could lose out as your cash is stuck at this rate.
To keep things simple, we have stuck to accounts that lock your cash in and no more. It's possible that by sacrificing access for a few months more, you could up the rate slightly above the best here.
- ICICI 4.7% AER. Online, from £1,000
The UK subsidiary of Indian owned bank, ICICI, is paying 4.7% AER on its three year fixed rate account, for balances over £1,000, with no maximum. ICICI is a full UK subsidiary and thus in the event the bank went bust, you have the full protection up to the usual £50,000 per person, per financial institution.
Some concerns were raised over its parent bank's stability, yet our policy is to include ALL the top rates. Remember that saving over £50,000 in ANY one institution constitutes a potential risk. If you are considering putting money in, ensure you read both the foreign banks section of the Are Your Savings Safe? guide and Martin's specific ICICI: How Safe is it? blog.
- B'ham Midshires 4.65% AER. Postal, min. £1
If you have less to save, Birmingham Midshires* has a three year fixed rate bond which pays 4.65% and is a postal account. You can save just £1, up to a £10 million maximum.
Birmingham Midshires is part of the HBOS group, and as such has the normal Safe Savings protection up to £50,000. However, it means that if you have money in another of the HBOS owned banks (Halifax, Bank of Scotland, The AA, Saga or IF), then you only get one lot of £50k protection between them.
- Use the net to compare top rates
For other lengths of fixed rates, and a full list of fixed rate savings accounts use the MoneySupermarket* and Moneyfacts comparisons, in conjunction with the Savings Safety guide to examine the protection for any accounts. However, with these it's crucial you double check the rates on the banks' own websites before applying, as the comparison tables are NOT continually updated.
The UK's Top Fixed Cash ISAs
A Cash ISA is simply a tax-free savings account, where you can put up to £3,600 each year. The tax-free nature boosts the interest, making them the first place most people should stash any cash. Read the full Cash ISA Guide.
Like normal savings, cash ISAs can also be fixed at a set rate for a year or more, and currently these rates beat all instant access cash ISA rates. Many also accept in transfers from previous years' cash ISA allowances (read Cash ISA Transfers for details on doing this).
Top One Year Fixed Rate
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Bank of Cyprus, 3.33% AER. Important! Not protected by UK safety scheme
The top rate is Bank of Cyprus Cash ISA Bond, paying 3.33% AER on amounts above £1 in this telephone or post account. Transfers in from previous years’ ISAs are allowed within 6 weeks of opening the account, plus you can withdraw money, although you will be charged 180 days worth of interest.
Importantly, the account is NOT protected by the UK scheme but the Cypriot scheme, which covers covers the first €100,000 (c. £90,000). See the foreign banks section of the Are Your Savings Safe? guide.
- Julian Hodge Bank BS 3.25% AER
Alternatively, if you want full UK FSCS protection, Julian Hodge Bank's Fixed Rate Cash ISA pays 3.25% AER for twelve months, although it can only be opened and operated by post. You must deposit the full £3,600 and can transfer in previous years’ ISA money from other providers.
If you try and withdraw or transfer the money out early, you will pay a penalty including interest and an admin fee. - Northern Rock 3.2% AER
The next best rate's with Government-owned bank Northern Rock which pays 3.2% interest until 15 November 2010. You have to save over £500 and can transfer in previous years' ISA's. Be aware that after the fixed rate is finished it will turn into a 30 day notice ISA. You can apply for this account by post and in branches.
You can access the cash during the fixed period, for a smallish penalty of 60 days interest.
Following Northern Rock's brush with collapse, the Government nationalised it and for now 100% guarantees all savings held in it. In the slim chance it's sold within the bond's fixed term, the safety could drop back to normal £50,000 level, though it'd be hoped the government would pick wisely about the institution any savings were sold to.
Top Deals of other lengths
If you want to lock your cash away for longer, other length deals are available, yet in the current climate there's little guidance on where rates will be in a few years time. If you choose to lock your cash away for several years now, fixed rates could improve, meaning you'l be locked into a non-top pick account.
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Two years, 3.75% AER
Bradford & Bingley (min £1,000) pays 3.75% AER on its online two year fixed ISA and you can transfer in previous years' ISA money.
If you have less to save Cheltenham & Gloucester's two year ISA also pays 3.75% from just £100, although you can only open and access it by post or in branches. -
Three years, 4.2% AER
If you can save £3,600 in a lump sum, Principality BS's Three Year Direct Fixed ISA pays 4.2% AER, with no withdrawals allowed for the duration. Financial strength rating's agency Moodys downgraded some institutions, including Principality, in April 2009, but as you can't save over the £50,000 safe savings limit in an ISA, it's not a huge issue here.
Alternatively, Marks & Spencer's 3 Year Fixed Rate ISA pays 4% AER for amounts above £500. The account allows transfers in from previous years' ISAs. It can be opened online, but only operated by telephone or post.
Fixed Rate deals can change regularly, for a full list of fixed rate ISAs use the MoneySupermarket* (select Cash ISAs and then Bonds) comparison or Moneyfacts.
What about my existing savings?
If you've already got a savings account, what happens following the base rate cut depends on whether it is fixed or variable. If you grabbed a fixed rate account, or do so now, the rate will apply for the set period. However, any other accounts are likely to be variable, and this means the provider can chop the rate whenever it likes.
Following such a huge interest rate cut, savings accounts (including cash ISAs) are very likely to swiftly follow suit. Monitor your rate closely; our Savings Accounts and Cash ISA articles include details on which accounts have already dropped their rates and which haven't. Once you're told about a cut, check to see how competitive your account is, and switch to a better rate if need be.
Do you live off savings interest?
When using fixed rate savings, you won't usually get paid monthly interest. Therefore many who rely on interest earned from savings as an income stream don't fix, even though they're paying higher rates. Yet there's a work-around.
Here's an example (ignoring tax for ease of explanation)...
A couple has £100,000, and can get 5% in a year long fixed account and 3% in an instant access account. They'd like roughly £5,000 of interest from these savings to supplement your income.
To do this, they should put £95,000 in the fixed account, and £5,000 in the instant access. Then spend the instant access money over the year, knowing the £4,750 interest earned in the fixed account will make up for it. They'll effectively get the high rate and be spending the interest.
This way you can grab the higher fixed rate accounts, but retain access to enough cash in the meantime. Remember though, if you might need to get at the whole lump within the fixed term, this trick won't help and fixed rates may not be for you.
How this affects mortgages
Predicting whether your lender will pass on the cheaper rates to you can be a tricky game. The recent fall in the base rate from 5% to below 1% has generally made mortgages cheaper, but not necessarily by the same amount that base rate has fallen. However, the latest cuts have forced UK interest rates so low that lenders may not even be able to afford to follow it.
Here's a quick guide as to whether you will gain.
- Fixed Rate Mortgage: No change, as your rate is fixed.
- Tracker Mortgage: Your rate should drop by 0.5% points, unless it has a ‘minimum rate' clause, known as a 'collar', which may mean you do not get the full cut.
After public and political pressure, a lot of lenders who had collars in their mortgage agreements, have decided not to enforce them. Of the big lenders who have collars in their deals....
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Nationwide. The big building society has a collars on its mortgages, which kicked in once the base rate fell to 2.75%.
- Halifax. Halifax used to operate a collar on its tracker mortgages but after December's cut this was removed, and it promised to pass on all further rate cuts. If base rate ever hits 0%, then any mortgages that track BELOW base rate would go to 0% too.
- Skipton Building Society. Skipton BS is retaining collars on all its mortgages. This kicked in at a base rate of 3%, so all existing tracker mortgage customers will see their rate frozen despite the base rate cut.
- Abbey. The Abbey does have a collar written into its mortgage deals, but it doesn't kick in until base rates hit 0.1%. We aren't there yet, but it's getting closer...!
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Nationwide. The big building society has a collars on its mortgages, which kicked in once the base rate fell to 2.75%.
- Discount/Standard Variable Rate: The lender can decide willy-nilly what it'll do. Most will drop the rate somewhat, perhaps by 0.25% points.
As a rule of thumb, per £100,000 of mortgage, a 1% point cut will save you roughly £80 a month, and 0.5% will save £40 a month.
Getting a new mortgage?
If you're in the process of getting a new mortgage, slow down. The rate cut is bound to change the game somewhat, so if possible it's worth holding off a few days to let lenders decide their policies and react to this cut.
More information, and a full PDF guide to mortgages can be found in the site's Mortgage Section.
Recession-proof your finances NOW!
The base rate cut can mean only one thing: the economy is in trouble. The aim of the cut is to boost the economy, stimulate spending and bring rates into line with other countries.Yet we as individuals must take it as a signal that recession is coming, and we need to protect our finances. This is a three-stage process, entailing learning to think with a recession head on, protecting your pocket, and making the most of every bit of cash you get hold of.
I've written a full, straighforward guide to bolstering your financial defences in preparation for the recession. The earlier you do this, the better, so act now to save paying later! Read the full Recession Proof Your Finances guide
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