Fixed Rate Bonds or Instant Access Account ñ Which is Right for You
We all know the Government is racking up debt at the fastest rate the countryís ever known. And when it comes down to our own personal finances weíre not much better!
But now thereís a glimmer of hope. New figures show that while our personal debt mountain is still growing, itís now started to slow down.
Each and every one of us owes an average £4,760 in unsecured borrowing and pays a whopping £2,645 a year in interest for the ìprivilege” of having borrowed so much.
Obviously thatís an appalling situation, so the news that weíre finally trying to do something about it should raise a weak cheer.
But weíve still got a fight on our hands. While the Bank of England is trying to help out by keeping base rates at just 0.5%, our High Street banks are still desperately short of cash. And that means theyíre charging us way higher interest rates on our borrowing.
But thereís plus side in having our banks strapped for cash: they want all the money they can get hold of ñ and are prepared to pay way over the odds to get it.
This desperation for depositorsí cash has been revealed over the past few months. Savers will have noticed how rates on almost all accounts have crept up in recent months as banks scrabble to get our attention ñ and our cash.
Naturally, those accounts which offer instant access tend to be those offering the least attractive rates, while those prepared to tie up their cash for longer get a better deal. That has always been the case.
Whatís different now is that the Bank of England is no longer keeping its cards close to its chest regarding the future direction of the base rate. Our public finances are in such a bad way that ministers are convinced we can only spend our way out of recession.
Quite simply this means it is a near certainty (although it can never be guaranteed) that base rates will stay at or close to 0.5% for the forseeable future. This, coupled with the High Street banksí desperation to shore up their battered balance sheets, has resulted in a unique situation.
Savers can be reasonable certain of a comparatively very attractive savings rates on cash they are prepared to tie into fixed rate accounts, or bonds.
Just a few months ago, it was near impossible to find a fixed rate bonds offering more than 4%. Now there is a good selection on offer from some of the High Streetís biggest names offering in excess of 5%. Bearing in mind that 10 times the current base rate, these deals look very attractive indeed!
Topping the list is Barclaysí 5-year bond offering 5.25% for a minimum deposit of just £500. But for those without even this much to save, Birmingham Midshires is offering a very healthy 5.15% for deposits of just £1 or more.
Of course the best rates are reserved for terms of five years plus. But for those who reckon they might want their money back sooner than that, there are good two and three-year deals on offer at 4.25% and 4.55%.
Itís also important to remember that while fixed rate bonds are designed to tie up your money for the duration of the product, not all refuse to return your cash if you need to get hold of it in a hurry.
Perhaps youíre a first time buyer trying to build up a decent deposit and waiting for the moment you think is right to put in an offer for your first home. The important factor here is to know that you wonít want to start looking until your fixed rate bond matures or you should choose a bond that can be redeemed early.
There are of course penalties for doing so but some arenít too onerous and the better rates available sometimes make the gamble worth taking, the best approach is to work out the return on the best bond you can find, compare it to the return you would get on the best instant access account, and see how much any early redemption penalty would eat in to extra interest you would have earned.
Something else that needs to be considered is what chances there are of increased rates on fixed rate bonds in the future. This is almost impossible to predict. But the chances of a significant increase are fairly slim given that the rates currently on offer are so good when compared to the base rate.
So it might well be worth taking advantage of the deals available now. In any case, keeping your savings in a low performance account just costs you dearly. At a time when money is tight but savings rates are rising and switching accounts has never been easier, thereís no excuse to miss out.
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