When is the best time to commit to a fixed rate? 5 October 2022 at 2:44PM edited 5 October 2022 at 2:48PM in ISAs & tax-free savings 4 replies 294 views

howryoo

Many, like me, are probably holding off fixing and have funds in an easy access account - ISA in this instance.

Obviously, the gap between the two could be large.

It'd be good if some of you could sense check below to see if I'm on the right track.

If I had 10k in a 2% account now, with the best fixed at 4%, I calculate that after 15 days, I'd have to fix with an account offering somewhere in the region of 4.10% to not lose out on the interest differential for the first 15 days if I had committed to the 4% straight away.

Around 30 days on the easy access, I'd have to commit to a fixed rate account of just over 4.15% to offset the loss compared to if I had committed to a 4% account from day 1?

Hope I've made sense?  Is my approach correct?

Are we likely to see 4.20 - 4.25% in the next month?

refluxer

howryoo said:

Around 30 days on the easy access, I'd have to commit to a fixed rate account of just over 4.15% to offset the loss compared to if I had committed to a 4% account from day 1?

Yes, that's about right. Here's a quick calculation...

For fixing now...
£10k @ 4% for 365 days = £400 total interest

For fixing in a month's time...
£10k @ 2% for 30 days = £16.44 interest
£10,016.44 @ 4.17% for 335 days = £399.80 total interest

...so you'd need a 4.17% fix to (roughly) break even in a year's time based on your two scenarios.

The numbers would be slightly different if interest was paid into the account monthly and compounded, although I don't think it would make a big difference.

refluxer

howryoo said:

Are we likely to see 4.20 - 4.25% in the next month?

There are no guarantees but what I can say is that the best 1 Year Fixed Rate Cash ISA at the end of August/early September was with the Coventry at 2.50%, so that's an increase of 1.2% in just over a month to the current best with Shawbrook at 3.70%.

Don't forget that the 4% fixed rate you're talking about is only available to Nationwide customers with maturing fixed rate ISAs. At 4%, I would say it'll take a good week or two for others to catch up but who knows ? Things definitely seem to be picking up on the Cash ISA front.

howryoo

Thanks refluxer.

Definitely difficult to judge when to commit to a fix, knowing the longer you leave it in a lower paying easy access account is resulting in losses of a few quid a day (depending on your capital).

masonic

howryoo said:

Thanks refluxer.

Definitely difficult to judge when to commit to a fix, knowing the longer you leave it in a lower paying easy access account is resulting in losses of a few quid a day (depending on your capital).

You can calculate the opportunity cost of staying in easy access for another week (difference between rates / 52) vs. missing out on higher fixed rates (average rate rise per week). At the moment it is strongly in favour of waiting, but as rates stabilise it will tip the balance the other way.