MSE News:Should you fix your savings? 14 January 2011 at 11:47AM in Savings & investments 9 replies 2.1K views

Former_MSE_Guy

This is the discussion thread for the following MSE News Story:

"With some economists predicting base rate will rise this year, is it still a good idea to plump for a guaranteed rate? ..."

Read the full story: Should you fix your savings?

Ken68

The trend does seem to be slowly creeping upwards, e.g. the minimum for 3yr fixes is 4% and lots of 1 yr for over 3%.
And I can see a 2yr at 3.55%..But things are getting better so for me dropping down the years is on.

Joe_Bloggs

It is always possible to split your savings between saving choices. Perhaps maintaining a variable rate portion and the rest in fixed term schemes for the fixed percentage rate.

This is what I did. Unfortunately there was only 0.5% between the fix and the totally flexible cash ISA rate with the same institution, Halifax.

I had to jump through hurdles to get what I got and the only proof is in my paperwork as far as I can tell from their increasingly Lloydification.

The fixed rate interest earned was never added to the fixed rate initial deposit. I just got a paper notification of it. I have to use my imagination as to the true value of the account.

I hope they remember to compound the interest they never appeared to credit to my fixed rate cash ISA account.
J_B.

Loughton_Monkey

Although it seems base rate rises are almost certain in the near future, I don't think term deposits should be written off too casually. It is not the odd rise that matters too much, but the speed at which they go up.

Whenever I have done calculations - which I recommend anyone does with any longer fixed rate they have their eye on - it has brought home the power of 'compounding'. Take, for example, the 2.9% 'instant' and compare, say, to a 4.3% three year. Now that's a full 1.4% clear 'profit' banked in year one if the 2.9% doesn't improve within a year. But put in some tentative base rate rises - perhaps so the 2.9% might be paying 3.25% by the end of the year. You're still miles ahead. Now take the (smaller) amount of money in your 'instant' and project that for another year - again, possibly, with some rises. Up to 4%? 4.5% even? surely not? But you are still ahead - especially with the compounding.....

You can play around with your two 'models' side by side - fixed versus variable - and find a 'shape' of instant rate rises that will make 'instant' accounts perform as well. Then you have to look at that profile of base rate (instant rate) rises and ask yourself how likely you think that profile is.

Whenever I have done it, I have considered the resulting speed of rises necessary to spoil the fixed rate is quite severe.

However, I have to say, in this country's turmoil at the moment, anything could happen!

... as an endnote, I tend to underline the point in the article about 'passing on' Base Rate rises. A 'typical' rate of, say, 2.8% is 2.3% above base rate. To believe that when base rate gets up to 3% [that's 10 standard rises] that we can readily get 5.3% on our instant access is to believe in Fairies, Father Christmas, and that bears use a flush toilet.

ManAtHome

Yes it is a bit of a game - I've opened quite a few instant access with bonuses and either cop decent fixed rates when they turn up or shuffle the cash around as the bonuses expire. Last couple of fixes I've used were Skipton 1 year at 3.3% and Coventry 3 year at 4.15% - next targets are 3.5/4.0/4.5 for 1/2/3 year or I'll stick with the shuffling (or just carry on using loose cash for spends and salary in the pension so hurry up you money-wanters!).

meher

Ok if I've made sense of this correctly, this is how I work it out - best would probably be to fix it on a yearly basis because most of the long term seemingly attractive rates only crystalise in the final year ie if you've found an offer of 4.75% in four years for instance. You'd invariably get lesser interest than most one year fixed rates offer. The second year too would be painfully low compared with other short term fixed rates on offer. The third year you've still not caught up with xyz who has been wisely repotting his savings each year with one year fixed rates. The final year you get the promised 4.75% whereas xyz who chooses to take up yearly fixed rates gets only the offer at the time; if he's lucky he might even get a better deal than yours. Even if it weren't the case, my guess is that he still has fetched more interest in four years than your four year fixed rate of 4.75%. So this is how I concluded - fixed rates are best for people who don't need money and for the astute, short term fixed rates. With that said I'm not a fan of variable rate savings although I'd go for the same in the case of mortgage.

ManAtHome

It's more the other way round Meher - with a 5 year fix at 4.75% pa you'd get your 4.75% every year, so better in the early years c/w (eg) 3% for a 1 year fix, 3.7% for 2 years etc. Downside is that rates could be much higher than 4.75% in 3 or 4 years time, so you could be losing out at the back end of the term.

For example if you fix £1000 for a year at 3%, this time next year you'd have £1030 (forget about tax and stuff for now). If you'd taken a 2 year fix at 3.5%, you'd have £1035 going into a second year at 3.5% to end up with £1071.23. So, back to the £1030 you have from the 1 year fix - you'd need 1 year fixes a year from now to be 4% to break even.

Hope that make sense.

Ken68

Nationwide seem to think rates will rise.

http://www.which4u.co.uk/bank-accounts/fixed-rate-bond-news/?format=feed&type=rss

SnowMan

It is hard to guage when interest rates will go up. I tend to look at the Bank of England yield curves which gives quite a good clue.

I am no expert at interpreting that data but it does seem to suggest a 0.25% base rate rise perhaps around May or June with rates increasing gradually over the next 5 years as per the graphs. At the moment one of the B of E monetary commitee is voting for an increase in base rate and the inflation figure released today is 4.8% (RPI of course, I don't recognise CPI as a suitable measure of inflation ). So I don't think an increase in base rate is far off.

At the moment because of the uncertainty I wouldn't opt for a 5 year bond (although I don't like fixing for more than a year in any case). But it is not clear cut. If you are getting 4.75% fora 5 year bond then there is scope for quite a good rise in interest rates over the period. For example at the moment in comparison with easy access accounts over 5 years, with the 5 year bond you are going into profit by about 1.75% pa while it lasts (4.75% less the approx best current buy instant access rate of 3%) and you need a suitably long period over the 5 years where the instant access rate is above 4.75% to counterbalance that.

With fixed rate bonds it is quite interesting there does seem to be times where they are 'mispriced' in terms of it looking good value taking one out. The period around December 2008 was a case in point where good looking fixed rates were for a short while still available even though a longish period of lower interest rates looked likely. At the moment they seem to be 'fairly' priced rather than looking good value.

prior446

Not mentioned in the article or in the discussion is the point that the return from a fixed savings account should be considered as the total over the fixed period. i.e. if you get 3.5% for two years when bank rate is 0.5% and 3.5% for a further year when bank rate has risen to 2.0% and savings rates have risen to 4.0% (maybe!) you still get a better return over the 3 years than you would have received from a variable rate savings account.