Earn 6.86% Interest On Your Savings

By Jane Baker | 28 April 2008

| 4 Comments

This article has already been emailed to Fools as part of our 'The Good, The Bad And The Ugly' campaign.

In this part of 'The Good, The Bad and The Ugly' series, I'm going to show you how to guarantee a healthy rate of interest on your savings.

The Bank of England base rate has been cut three times in the last six months alone and now stands at just 5%. This is normally pretty bad news for savers, as banks often take the opportunity to lower interest rates on savings accounts.

However, we don't live in normal times and interest rates on savings accounts aren't falling as much as you might expect. That's because the cost of inter-bank lending remains high due to the credit crunch. Since it's still expensive for banks to gain funding from each other, many have become even more reliant on deposits than usual.

This can translate into better rates overall to entice savers just like you. Even though the base rate may continue its downward trend for the rest of the year, we could see savings rates weathering the storm regardless.

If you're able to save money at the moment, it's definitely worth considering a fixed rate savings bond where you'll find some excellent rates of return. Even better, the rates are guaranteed to stay the same until the bond matures, so you'll know upfront how much you're going to earn in interest.
Take a look at these market-leading accounts:

Top Six Fixed Rate Savings Bonds 

*Available to new and existing customers who are transferring or paying in money from outside Alliance & Leicester.

As you can see, you could take advantage of top rates above 6.80% with bonds available over various terms and requiring different minimum deposits. But, despite the impressive interest rates on offer, savings bonds come with one key drawback: in return for a guaranteed high rate, you'll have to sacrifice access to your cash during the term.

For this reason, you should only choose a fixed rate bond if you're absolutely sure you can lock your money away. You can commit for a relatively short period of say, just six months or, if you prefer, for several years. Whichever you go for, make sure you don't need your money back before you reach the maturity date.

Bear in mind some bonds, such as Icesave's Fixed Rate Savings Account, won't allow withdrawals under any circumstances. Others may permit access but only with a heavy penalty. With Alliance & Leicester's Six Month Fixed Rate Bond, for example, you'll lose 180 days interest if you take out any cash -- which would bite a pretty large chunk out of your return.

Meanwhile the Fixed Term Deposit from Kaupthing Edge deducts an interest penalty of 1% (gross) for early withdrawal, making the account far less attractive.

That said, if access to your money isn't an issue for you, you would be hard pressed to find better savings rates elsewhere. For example, market-leading instant access accounts currently offer a competitive rate of 6.50% (variable), but that still falls short of fixed rate bond best buys.

What's more, once you have taken out a fixed rate bond you don't really need to think about it again until it matures. There's no need to continually shop around to make sure your rate is still topping the tables (something which is necessary from time to time with a variable rate account).

Of course, with a fixed rate account there's a risk you may lock-in at an interest rate which falls behind the market-leaders later on. This risk is even greater where you take out a bond over the longer term, when it's more difficult to predict which direction savings rates will go and how your fixed rate account will then measure up.

Luckily, many of the best bonds are available over six months to one year and given that the base rate is predicted to fall further in 2008, I think short-term fixed rate bonds are a pretty good bet at the moment.

Compare fixed rate bonds and instant access savings accounts at The Motley Fool Savings Centre.