Long term fixed rate accounts reasonable option?

MoneySaver16

I am considering going for a 5 year fixed account and wanted the pros/cons from the community before committing. I have not used fixed products beyond a year before so am a little apprehensive.

The reason I am considering it is that I have a mortgage secured a chunk below 2% for the long term so instead of overpaying I could earn more in other accounts.

I have around 1/3rd of my mortgage value in short term or flexible accounts earning more than the mortgage rate but with rates steadying I am wondering if now is the time to lock in a portion at the current rates which are 2-2.5 times my mortgage rate instead of doing regular 1 year renewals.

My current plan would be to split it up and lock away part for the long term and the rest on shorter term renewals and easy access to keep an emergency fund and spread the risk a bit.

If anyone has done this before it would be great to hear from you

InvesterJones

Yes, entirely reasonable thing to do. I'm sure you've taken into account tax as well, and how you plan to use the money once it matures from the fixed account (whether any overpayment limits apply for your mortgage etc.)

jaypers

As long as you are absolutely sure you won’t need any access to the money, it’s probably a good consideration. You will not be able to get to the money in the 5 year period. 6 months ago, it might have been more risky but longer term future seems to now be indicating that rates might start dropping back again to a longer fix now is a good consideration. I am now looking at 2 years rather than my preferred 1 year but nothing longer for me. 

Band7

Depending on your income tax rate, and whether you are likely to bust your allowance for savings interest, this year or in the next few years, a fixed rate ISA might be an option for some of your savings

Albermarle

Similar thread today
Advice on Cash ISA term — MoneySavingExpert Forum

MoneySaver16

Thank you for the responses and the thread link, how did I miss that!

Tax is a potential consideration and my current thinking is to use partners remaining ISA allowance for this year and then again for next year. This would be tax free and accessible in the worst case in exchange for an interest penalty.

Splitting in to two pots over ISA years is also a bit of insurance as if I needed access I could just draw on one of the pots instead of the whole thing halving the penalty

Beginning to sound like a good option to me!

Albermarle

Thank you for the responses and the thread link, how did I miss that!

As you can imagine, speculation on fixed term rates, is a regular topic on the forum.

BooJewels

You've seemingly had your answer already but another option to consider is something I've done, as it suits my own personal circumstances - different from yours, but similar in motivation.  I'm perhaps the only person here that prefers this option.

Another way to split it up a bit is to put the capital into a fix (in my case, more than one, with different terms), but one that has monthly paid interest into an external account - preferably an easy access with a decent rate.  You lose a smidge this way, as monthly interest fixes tend to pay a bit lower rate and you lose some of the compounded interest at that higher rate - but if you keep that monthly interest in another easy access account to compound there instead, it releases the interest as you go along, to be either an emergency fund, or you could perhaps even over-pay your mortgage with this aspect of it.  Plus you could potentially reinvest that at some point, if something better comes along during the life of the fix.

I decided, that for me, getting the interest as I went along was worth a modest hit for the reassurance of being able to get at it, if I need to.  I almost certainly won't, but I like that it psychologically felt better than not only locking away the capital, but the interest too - that was a mental barrier I was finding hard to overcome.  It probably works out similar to having an ISA with penalties for early withdrawal - you take a modest hit for being able to relinquish it early - I take a modest hit for getting the interest released back to me.

JGB1955

BooJewels said:

You've seemingly had your answer already but another option to consider is something I've done, as it suits my own personal circumstances - different from yours, but similar in motivation.  I'm perhaps the only person here that prefers this option.

Another way to split it up a bit is to put the capital into a fix (in my case, more than one, with different terms), but one that has monthly paid interest into an external account - preferably an easy access with a decent rate.  You lose a smidge this way, as monthly interest fixes tend to pay a bit lower rate and you lose some of the compounded interest at that higher rate - but if you keep that monthly interest in another easy access account to compound there instead, it releases the interest as you go along, to be either an emergency fund, or you could perhaps even over-pay your mortgage with this aspect of it.  Plus you could potentially reinvest that at some point, if something better comes along during the life of the fix.

I decided, that for me, getting the interest as I went along was worth a modest hit for the reassurance of being able to get at it, if I need to.  I almost certainly won't, but I like that it psychologically felt better than not only locking away the capital, but the interest too - that was a mental barrier I was finding hard to overcome.  It probably works out similar to having an ISA with penalties for early withdrawal - you take a modest hit for being able to relinquish it early - I take a modest hit for getting the interest released back to me.

I'm just about to do that - £30K split into £10K 1year fix, £10K 2 year fix, £10K 3 year fix... at 4.2%/4.4%/4.5%.