Have I made a mistake (5yr fixed-rate savings)?

Jelli

Hi,

No-one knows what interest rates will be like up to 2019 but I'm very new to saving and wondering if I've made a mistake locking myself into a fixed-rate savings account of 3.2% up to 2019. Is it believable that an interest rate could go as high as 5-10% in 5 years time, and generally how high have they been in the past?

Sorry if there is plenty of advice already on this but have difficulty using my computer for long periods of time.

N1AK

I wouldn't have put the money there myself, but that doesn't mean it was a mistake.

Firstly you don't have to worry about what interest rates will be in 5 years, but rather what they will average over the next five years. Secondly, it depends on how much money you're saving, whether you pay tax, whether you have spare ISA capacity, when you might need the money and your attitude to risk.

Personally as a tax payer I'd be more inclined to put the money into a Santander 123 account paying 3% interest now (up to £20k) than lock it away for 5 years at 3.2%.

brendon

You could always take the money out and put it somewhere else. If you've only just put it in, you won't lose much.

colsten

N1AK wrote: »

Personally as a tax payer I'd be more inclined to put the money into a Santander 123 account paying 3% interest now (up to £20k) than lock it away for 5 years at 3.2%.

Agree, 3.2% for 5 years wouldn't appeal to me. I'd spread my money between TSB, Lloyds, Tesco and FD/Lloyds monthly savers, plus potentially Santander and BOS. Plus I would max my S&S ISA each year.

Jelli

N1AK wrote: »

Secondly, it depends on how much money you're saving, whether you pay tax, whether you have spare ISA capacity, when you might need the money and your attitude to risk.

I'm saving £6000 and don't pay tax. I didn't need access to the money for quite some time (beyond 3-7 years), but just wanted to generate good interest. I do have ISAs but didn't use them because they only did 2.50% while my 5 year account does 3.20%.

I can't take out the money period and is a condition of the rate being fixed. I'm aware current accounts pay better than savings accounts but can't open one because of an old bankruptcy from 2012, plus 3.20% seems better than most of them anyway but it's a long term rate.

colsten

brendon wrote: »

If you've only just put it in, you won't lose much.

How much you lose depends on the T&Cs - you might have to pay some from your capital to cover the charges. Some accounts don't allow any withdrawals / termination except in extreme circumstances.

brendon

colsten wrote: »

How much you lose depends on the T&Cs - you might have to pay some from your capital to cover the charges. Some accounts don't allow any withdrawals / termination except in extreme circumstances.

Good point. It's normally 90-120 days interest. Some banks charge 365 days. Even 90 days interest might be worth it.

colsten

Jelli wrote: »

I'm aware current accounts pay better than savings accounts but can't open one because of an old bankruptcy from 2012, plus 3.20% seems better than most of them BUT it's a long term rate.

In which case, you probably chose the best option available to yourself. Time will tell.

eskbanker

Jelli wrote: »

I can't take out the money period and is a condition of the rate being fixed.

....in which case it's a completely moot point as to whether you've made a mistake or not as you couldn't do anything about it even if you had, so best not to worry about it, just accept that the die is cast!

Jelli

eskbanker wrote: »

....in which case it's a completely moot point as to whether you've made a mistake or not as you couldn't do anything about it even if you had, so best not to worry about it, just accept that the die is cast!

As it's a brand-new account I have 30 days to cancel.

Thanks for all the replies as it seems there aren't many options for me anyway, and the one I've picked might be OK-ish for 5 years.

princeofpounds

Try not to panic too much.

- If it's done, and there is no escape clause, then it's done. Worrying about it now won't help anyway.

- As long as you went into a competitive product then the 5 year fixed rate offered is likely to be quite similar to the market expectations of average variable interest rates for similar products over the next 5 years. That is a crude approximation but it generally holds (I will omit the financial theory that explains why for simplicity).

- Obviously those expectations may turn out to be wrong, but it is likely a case of being sub-optimal rather than disastrous. For example, if interest rates average 5%, rather than 3.2%, then after 5 years you will have about 10% less than you would have otherwise done, in relative terms. Not the biggest deal. And remember every day rates stay low you are building up a cushion of gains; rates may be rising soon, but that doesn't mean they will go far or fast.

- As for whether it is possible that rates rise to 5-10% in 5 years tims... yes. It is possible. But it is not likely - especially the 10% level. Rates are likely to be sustainably lower than they were in the past as the economy is carrying much more debt now and has much less growth potential.