Pros and Cons of Variable Rate Accounts

The majority of accounts are those that have variable interest rates. However, there are also fixed rate account alternatives. The variable rate accounts can provide some advantages for account holders, but much depends on the general account package.

Variable interest rate accounts are those with fluctuating rates. The fluctuations come about with interest rate reductions or increases after you have opened the account. In comparison a fixed rate account will not in anyway vary from the original quoted rate of interest, unless you close the account early. There will be no further increases or reductions for that rate.

With a variable rate account you should not consider that the quoted rate will ever remain the same. Thus it is much less clear what exactly the account will return over any fixed period as the rate will either increase or decrease. So if you’re searching for an account with a specific interest rate a variable account may not be ideal.

Generally, variable rate interest accounts can be opened for longer periods than fixed rate accounts. A number of fixed rate accounts may require that you have the account open for a specific period, similar to bonds. For example, there are quite a few one year fixed rate accounts that have a specific closing date. However, most variable rate accounts have no specific closing dates, and so can be considered longer-term accounts.

It’s worth noting that some variable rate accounts generally have lower rates than fixed alternatives. A higher fixed rate is usually provided for a more limited period. As such, these fixed rate accounts can provide greater returns than variable accounts, especially during periods when general interest rates are reduced. Then variable account rates will likely drop further from the original interest rate whilst fixed rate accounts will remain static.

But variable rate accounts can have short-term bonus rates. Those will likely be higher than the prevailing rates of the period. Once the rate expires they will drop back down. Certainly that’s not something that would be included with a fixed rate account.

Another advantage of variable rate accounts is that they are generally more open. The majority of current accounts have variable rates. Unlike variable accounts, fixed rate accounts may not permit regular withdrawals from them.

Thus variable rate accounts are more suitable as depositories and standing order accounts. Not all variable accounts may be considered as much of an investment at all. For higher levels of interest you should check out the fixed rate savers and bonds.