Does a five year fixed rate bond make sense or is it too long?

Nova1307

Hi all, 
There are a few 5 year fixed rate bonds paying up to 4.9% pa. Is this a good opportunity to lock in a good rate for savings that I'm pretty sure I won't need to access for five years? The rate is almost on a par with a buy to let property investment but without the hassle of landlord obligations. I'm conscious that five years is a long time and so perhaps 3 or 4 years (at a slightly lower rate) may be more prudent?

It appears as though interest rates may have peaked and once the Govt gets inflation under control I would expect the BoE to turn it's attention to the recession which could well result in interest rate reductions potentially starting as early as next year. We had very low interest rates since the 2008 crisis and I just get the feeling that developed countries like the UK don't want a return to higher interest rates and would prefer us all to spend rather than save. 

Thanks

dunstonh

Is this a good opportunity to lock in a good rate for savings that I'm pretty sure I won't need to access for five years? 

Is this money that is going to be spent in 5 years or will you be rolling it over again? (rollovers are very common indicating poor financial planning with long term FTDs)

The rate is almost on a par with a buy to let property investment but without the hassle of landlord obligations. 

You would hope a BTL is more than just 4.9% total return.   Even for the running yield, 4.9% is at the low end and suggests either a generous landlord or unsuitable rental property.

 I'm conscious that five years is a long time and so perhaps 3 or 4 years (at a slightly lower rate) may be more prudent?

5 years for an FTD is a long time, but for financial planning it is short-term.    If its money planned to be held for say 10 years, then its unlikely an FTD would be suitable for all of it.

 We had very low interest rates since the 2008 crisis and I just get the feeling that developed countries like the UK don't want a return to higher interest rates and would prefer us all to spend rather than save. 

In most periods, spending is the preferred option.  However, we have a strange period at the moment where we are in a recession but also the BoE is trying to cool the economy.     You shouldn't expect a return to post 2008 interest rates.  They were an anomaly and the world needs to get used to rates more typical of historic levels. 

Albermarle

If this constituted a major part of my assets, I would be wary of tying it up for 5 years, as a lot can happen over a long period. If I had easy access savings, some shorter fixed rates, some investments, low mortgage rate etc and the amount in a 5 year fix was only a part of the mix, then it could be a good idea to add some certainty to future returns.

Black_Cat2

Just my experience on these long term fixes.. it's important to consider your tax situation when the bond matures. 

Personally I have opted for a monthly income so that the tax is (hopefully) in the current tax year 🐈

Dave_5150

Makes sense for my saving goals and I'll be splitting £75k over a couple of 5 year fixes early next week when my current six month fix ends. I opened new accounts when I first spotted rates dropping so they're 4.95% and 5%.

Only you know your goals and can decide whether it makes sense in your circumstances. As an example I've already maxed out this years ISA allowance, made £25k of annual pension AVC's and I have no appetite for loss so investing isn't appealing.

Nova1307

dunstonh said:

Is this a good opportunity to lock in a good rate for savings that I'm pretty sure I won't need to access for five years? 

Is this money that is going to be spent in 5 years or will you be rolling it over again? (rollovers are very common indicating poor financial planning with long term FTDs)

The rate is almost on a par with a buy to let property investment but without the hassle of landlord obligations. 

You would hope a BTL is more than just 4.9% total return.   Even for the running yield, 4.9% is at the low end and suggests either a generous landlord or unsuitable rental property.

 I'm conscious that five years is a long time and so perhaps 3 or 4 years (at a slightly lower rate) may be more prudent?

5 years for an FTD is a long time, but for financial planning it is short-term.    If its money planned to be held for say 10 years, then its unlikely an FTD would be suitable for all of it.

 We had very low interest rates since the 2008 crisis and I just get the feeling that developed countries like the UK don't want a return to higher interest rates and would prefer us all to spend rather than save. 

In most periods, spending is the preferred option.  However, we have a strange period at the moment where we are in a recession but also the BoE is trying to cool the economy.     You shouldn't expect a return to post 2008 interest rates.  They were an anomaly and the world needs to get used to rates more typical of historic levels. 

Sorry I am not sure how to respond to multi quotes. My intentions beyond five years are not clear - I would prefer to reassess then in order to deal with any change in circumstances. 

I did say 'almost on a par' with BTL. I accept it may be at the lowe end but I know one or two landlords in London who are getting around 5% and that doesn't include the time they have to spend dealing with tenants, issues, letting agents etc. 

Thanks for your input. 

Nova1307

Albermarle said:

If this constituted a major part of my assets, I would be wary of tying it up for 5 years, as a lot can happen over a long period. If I had easy access savings, some shorter fixed rates, some investments, low mortgage rate etc and the amount in a 5 year fix was only a part of the mix, then it could be a good idea to add some certainty to future returns.

I am only referring to around 10% of my savings and so definitely not the lion's share. A mix of easy access, one year, two years and five years could be a good hedge with the majority in easy access/one year FR.

P933alilli

What is an FTD? Sorry to butt in but in a retired situation with state pension expected in 8 years maybe a fixed rate bond is a good option especially if, as predictions are correct, inflation falls right back in the next 18 months then below target rate of 2% for three years? Ive opened a 5.1% with Gatehouse bank which will compound for 5 years.
   I also have another fixed rate which matures in february stuck at 1.51% (1 yr) and another maturing in june at a measly 1.04% ( 2 yr). I have 14k still not invested in my vls60 this tax year. I have enough easy access cash until my next 40k matures in feb. But come feb what would be the ideal thing to do? Stick in another fixed rate bond or use the 14k to top my s&s isa up in vls60?
  One final question, again sorry for hijacking! My vls60 increased by c. 1.45% yesterday and i wondered why. And finally my vls60 is down just under 3% which in the grand scheme of things isnt as bad as it could be. -11% inflation though!

Nova1307

Collyflower1 said:

What is an FTD? Sorry to butt in but in a retired situation with state pension expected in 8 years maybe a fixed rate bond is a good option especially if, as predictions are correct, inflation falls right back in the next 18 months then below target rate of 2% for three years? Ive opened a 5.1% with Gatehouse bank which will compound for 5 years.
   I also have another fixed rate which matures in february stuck at 1.51% (1 yr) and another maturing in june at a measly 1.04% ( 2 yr). I have 14k still not invested in my vls60 this tax year. I have enough easy access cash until my next 40k matures in feb. But come feb what would be the ideal thing to do? Stick in another fixed rate bond or use the 14k to top my s&s isa up in vls60?

FTD = Fixed Term Deposit. 

I may be wrong but I think this is a good opportunity to lock in some good savings rates. Once inflation is under control I see rates declining and while the days of 0-0.5% may be over I don't see rates climbing back up to almost 5% unless inflation becomes a problem again due to some e.g. geopolitical event. 

Albermarle

made £25k of annual pension AVC's and I have no appetite for loss so investing isn't appealing.

Presume the money in your AVC is in investments?

My vls60 increased by c. 1.45% yesterday and i wondered why. And finally my vls60 is down just under 3% which in the grand scheme of things isnt as bad as it could be. -11% inflation though!

Despite all the bad news, financial markets have perked up considerably in the last few weeks.

However VLS60 is still about 9% down so far this year, in common with other medium risk investments.

P933alilli

Albermarle said:

made £25k of annual pension AVC's and I have no appetite for loss so investing isn't appealing.

Presume the money in your AVC is in investments?

My vls60 increased by c. 1.45% yesterday and i wondered why. And finally my vls60 is down just under 3% which in the grand scheme of things isnt as bad as it could be. -11% inflation though!

Despite all the bad news, financial markets have perked up considerably in the last few weeks.

However VLS60 is still about 9% down so far this year, in common with other medium risk investments.

Just realised that the S&P was up 3% yesterday so assume that makes up much of the U.S equity in vls60. I only started in late january so missed the highest prices at the start of the year. I also bought 4k worth when the price had fallen 10% so that helped bring down my average price too.