The Pros and Cons of Fixed Interest Saving Accounts

Savings accounts can vary somewhat, as some can have variable interest rates and some have fixed rate. Variable interest rate accounts are those for which the interest rate can be adjusted. However, a fixed interest variable account has an interest rate that will not be either raised or reduced at any time. Whether these are a better alternative to variable accounts is somewhat debatable.

Fixed interest saving accounts do usually have a higher rate of interest than most alternative variable saving accounts. For example, it’s not unheard of for fixed interest accounts to have interest rates that exceed five percent or six percent. While some variable saving accounts may have short bonuses which inflate their rates, these interest rates do not last. They will drop down to a much lower interest rate after the bonus period ends.

However, fixed interest saving accounts usually cover a specific period. As such, fixed interest rate saving accounts are not as flexible as variable rate accounts. For example, there may be one, two or three year fixed interest saving accounts. The longer the period the higher the interest rate may be. But if you make a withdrawal, this may then reduce the interest rate. A fixed interest rate account’s interest will likely be reduced if you make an early withdrawal or close the account before a closing date. It’s worth taking note of the terms and conditions of the fixed saving account.

Fixed interest saving accounts can also have different deposit requirements. They may be higher than other alternative variable rate saving accounts. However, if they are ISA saving accounts then you can be sure that you cannot invest more than £5,340 in a year. Of course, if you have a fixed rate ISA then that will also be tax-free.

Other advantages of fixed interest rate saving accounts are that they are predictable. As their interest rates are fixed, you can be sure of exactly what they will return each year. Premium Bonds and stock based investments are not nearly as predictable as the fixed interest saving accounts. The only other comparable alternative is that of bonds which are not dissimilar from fixed interest saving accounts.

So, fixed interest rate accounts are good shorter-term alternatives to variable rate accounts with their higher interest rates. Just so long as you can be sure that you will not have to close the account early. As most banks usually have fixed interest rate account alternatives, they are worth noting.