Fixed Rate: How long would you advise is "too long" at the moment?

Nine_Lives

From what i understand:

Fixed rate: you take out an account for x% over a course of x-months or x-years. If by the time that course has finished, the rates are lower or equal to what you took out, then you're quids in. If they're higher, you've lost out

With that in mind, what would you personally advise is too long a course (i.e. too big a risk) at the moment, with interest rates the way they are.


I've got a 6 month running which matures in a few months. I'd possibly take out a 1year, but i think anything after 1 year is a bit iffy for me.

Kohoutek

Given the volatile and uncertain economic/political situation, and uncertain outlook for inflation (e.g. oil prices are trending higher atm), go as short as possible.

If you don't mind having your money locked up for a year, buy a 3 year index-linked saving certificate from NSANI. It pays 1% interest + RPI, which currently translates into a real return of 4.7% tax free. Despite the '3 year' name, you can withdraw your money after 1 year with no penalties and all interest paid.

Kohoutek

Basically, the product is a fixed rate bond that pays a minimum of 1% interest, which on its own is not very good. However, on top of that, it pays whatever the current rate of inflation is, according to the Retail Price Index, calculated by the Office of National Statistics. So if inflation is 1% it pays 2%, if inflation is 5% it pays 6%. However, if inflation drops below zero, it will still pay the minimum 1%, never less.

http://www.statistics.gov.uk/CCI/nugget.asp?ID=19&Pos=1&ColRank=1&Rank=310

bendix

Kohoutek wrote: »

Given the volatile and uncertain economic/political situation, and uncertain outlook for inflation (e.g. oil prices are trending higher atm), go as short as possible.

.

Why?

All the noise at the moment is that interest rates will remain low until at least the middle of 2011.

And, anyway, it depends what rate you're getting, doesnt it? I have some of my money tied at 7.3% for five years and am very happy to trade any potential increase over that rate in the duration with both certainty and the fact that I'm getting a very very good rate at the moment.

Plus, it compounds so the AER is actually higher.

Rollinghome

Kohoutek wrote: »

It pays 1% interest + RPI, which currently translates into a real return of 4.7% tax free.

Unfortunately it doesn't depite the misleading impression given in the MSE email.

In the year to February, RPI annual inflation was 3.7 per cent due to various factors, including VAT returning to 17.5%, so someone who had taken out a certificate 12 months before would have got that. Someone taking out one today will get 1% + the increase in the RPI in 12 month's time whatever that might be. What's often called the "current rate of inflation", meaning the increase in the RPI over the previous 12 months, isn't really relevent.

Kohoutek

bendix wrote: »

Why?

All the noise at the moment is that interest rates will remain low until at least the middle of 2011.

Because the OP was looking to put their money away for a maximum of one year, and the best one year rates are still negative in real terms. Do you think a negative real return is a great investment?

bendix wrote: »

And, anyway, it depends what rate you're getting, doesnt it? I have some of my money tied at 7.3% for five years and am very happy to trade any potential increase over that rate in the duration with both certainty and the fact that I'm getting a very very good rate at the moment.

Plus, it compounds so the AER is actually higher.

Last time I looked 7.3% wasn't available for new money.

Rollinghome

Kohoutek wrote: »

Because the OP was looking to put their money away for a maximum of one year, and the best one year rates are still negative in real terms. Do you think a negative real return is a great investment?

Again, strictly speaking that's an unknown. You're measuring interest rates going forward against an historical measure of inflation over a 12 month period that's gone when available rates were higher. You won't know whether rates offered today will keep up with inflation until the end of the period you're measuring.

Nine_Lives

Kohoutek wrote: »

Because the OP was looking to put their money away for a maximum of one year.

That's not actually what i was asking. I should've made myself clearer.

I was asking in YOUR (the replier) opinion, how long would you invest for, but not go beyond (i.e. Person A would invest for 2 years fixed, but wouldn't risk going for 3 years because XYZ)

My opinion based on what little i've learned in the short time i've been doing this, is that i wouldn't go above 12 months myself. I wouldn't want to invest for 2 years & then see the interest rates rise higher during that time.



As far as my money goes, i'm looking to make it work as best as i possibly can. If that's putting it away for 1 year or 5 years, then so be it. I just want it to work as best it can.

Kohoutek

Rollinghome wrote: »

Again, strictly speaking that's an unknown. You're measuring interest rates going forward against an historical measure of inflation over a 12 month period that's gone when available rates were higher. You won't know whether rates offered today will keep up with inflation until the end of the period you're measuring.

That's true, but do you expect inflation to drop to the level required to pay a real return? If inflation was still running at +3.7% YoY in April 2011, a one year bond paying 3.3% (the best available today) makes a return of -1.06% after tax. With oil prices on a trend upwards, I don't think inflation is going to drop dramatically (and there's always the chance the govt will launch QE II, weakening the pound).

Mickygg

in short, no one knows. You have to be comfortable with what you are doing. Why not split your money and fix some for 2 years, some for 1 year and keep some instant access. That way not all your eggs are in one basket. I have fixed my isa for 3 years and keeping any other savings instant access.

focae

Using Yorkshire Bank 5yr fix at 5% and Santander 1yr 3.2% variable with a bonus - both ISA's so that tax doesn't complicate things:

If you invest £1000 at 5% for 5yrs you will end up with £276.28 compound interest.

If you invest £1000 at 3.2% for 1 yr you will end up with £32.00 interest. If you then reinvest this with the original £1000 you would have to earn aprox 5.5% compound interest for the next 4 yrs to equal the 5% for 5yrs.

If you were to invest the £1000 for 2 yrs at 3.2% you would earn £65.02 compound interest. You would then have to earn 6.2% for 3 yrs if you reinvested the money to match the 5% for 5yr deal.

So perhaps long term fixes aren't so bad after all.