Question about fixed term deposit accounts.

Lynt_3

Could some kind soul, please explain to me why the interest rate goes down the longer the fixed term. I had imagined it being the other way round, but then again, I'm quite ignorant in these matters.
i.e
Lloyds TSB
6 month term 4%
1 year term 3.75%
2 year term 3.50%

I can't see the incentive to keep money long term

opinions4u

Two reasons.

1) Banks have a short term funding short fall - so higher rates for shorter terms please.

2) The outlook for interest rates is to fall, so they expect to be able to raise the money for less further down the line.

Lynt_3

Thanks. I think I understood

I still don't see why anyone would go for the 1/2 year

opinions4u

Lynt wrote: »

Thanks. I think I understood

I still don't see why anyone would go for the 1/2 year

If you invest for 6 months, rates may be significantly lower at the end of the term.

Saving for 6 months at 4.0% may come to an end and the best rate on offer in May might be 2% for 12 months.

You'd have been better to go for the longer terms now - IF you can accurately predict future rates (not that any of us can).

Higher 6 month rates than 4% exist btw. Many places still offering over 5%!

Lynt_3

Thanks again for your patience

I can see, in the present climate, that it would be interesting to go for a 1 or 2 year, because we are expecting rates to go down. But what about in better times?

I'm just curious.

gozomark

But what about in better times?

normally, the longer you fix your returns for, the higher the rate, but it varies during the economic cycle

masonic

Lynt wrote: »

I can see, in the present climate, that it would be interesting to go for a 1 or 2 year, because we are expecting rates to go down. But what about in better times?

In good times, banks will tend to be able to predict future rates quite accurately. Banks usually intend for these accounts to pay slightly more than instant access accounts and in good times that's what will tend to happen.

The times you want to avoid when fixing your rate is when banks are overly pessimistic about what will happen to future rates. Once 'experts' start predicting dramatic things will happen to rates in the future and banks have had an opportunity to react and change the rates they are offering, fixing your rate is a gamble, which will sometimes pay off and sometimes not.

Paul_Herring

Lynt wrote: »

Thanks. I think I understood

I still don't see why anyone would go for the 1/2 year

You might not want your money tied up for a year. See https://docs.google.com/View?docID=dwnwdnb_66drzgz6f4&revision=_latest&hgd=1 for an example of why.

opinions4u wrote: »

Higher 6 month rates than 4% exist btw. Many places still offering over 5%!

Halifax are currently offering 6.25% for 3 months. BM are offering 5.83% AER for 6 months. And (strangely) Halifax again are offering 6% for 9 months. (See link above.)

Lynt_3

Thanks very much for the links, and the very helpful ladder.
Halifax 3 or 9 months looks interesting.
I feel a bit unsure about putting more in my Egg 6.3% fixed with the trouble Citigroup are having.