Fixed savings rates expected to fall: What should you do?

As average rates on fixed bonds fall, savers should act to ensure they’re getting the best return on their money.

While the leading rates on fixed bonds remained relatively stable between July and August, analysis by Moneyfactscompare.co.uk suggests that rates could fall over the coming weeks and months.

Average rates on most fixed bonds decreased in the month to August, with longer-term fixed bonds seeing particularly significant falls.

For example, the average rate on five-year fixed bonds dropped from 3.98% at the start of July to 3.92% at the start of August, while the average four-year fixed rate bond dropped from 3.93% to 3.87%.

This comes after the Bank of England lowered the base rate from 5.25% to 5.00%, marking its first cut in more than four years.

“The Bank of England base rate cut is expected to slowly trickle through the savings market over the coming weeks and, while this typically impacts variable rates, the consequences can also lower interest rates on accounts that guarantee returns, like fixed bonds,” commented Rachel Springall, Finance Expert at Moneyfactscompare.co.uk.

Bracing for lower rates

Fixed savings rates are lower across the board than one year ago, when savers could lock in rates in excess of 6.00%.

Top interest rates based on a £10,000 deposit as at the start of the month.

For example, the top rates on one-year bonds fell by 0.65 percentage points between August 2023 and August 2024, while the average rates fell by 0.58 percentage points.

As a result, any savers with a one-year bond that’s about to mature are likely to have no option but to put their money in an account that pays a lower rate of interest.

Rates on longer-term bonds have seen an even more notable drop, with the top two- and three-year bonds falling by 0.97 and 1.15 percentage points respectively over the past year. Meanwhile, average and leading rates on five-year bonds both fell by 0.85 percentage points.

Average interest rates based on a £10,000 deposit as at the start of the month.

If savings rates continue this downwards trend, savers who took out longer-term fixed bonds when savings rates were at their highest should be prepared for lower rates once their bonds mature.

But even though savings rates are lower than they have been, savers may miss out on potentially competitive accounts if they wait and hope for rates to increase before locking in a deal.

“Savers sitting on the fence to invest their cash with a fixed rate bond may wish to do so quickly, as the top rates are not guaranteed to sit on the shelf for long. Those waiting for their bond to mature and cannot yet grab a new deal would be wise to brace for impact as rate cuts could be on the horizon,” Springall noted.

Choosing an account

Short-term bonds continue to pay higher rates than longer-term bonds, as they have done for the past couple of years. Savers used to be able to get better returns by locking away their money for longer but, as of 1 August, the average one-year bond paid 4.63% compared to 3.92% on five-year bonds.

However, while putting your money into a one-year bond may pay the highest rate initially, locking into a longer-term bond could offer a better return overall if savings rates continue to fall.

On the other hand, it’s difficult to predict what could happen in several years so, if interest rates rise, you could miss out on higher-paying accounts if your money is locked in a long-term bond.

Ultimately, it’s up to each individual to decide where to deposit their money. As well as the interest rate, it’s crucial to think about how long you can afford to lock your money away for as you can’t access money in a fixed bond until the end of the term.

Some savers may choose to split their savings and put some of their money in a short-term bond, while also putting some into a longer-term bond. It’s also a good idea to have some money to act as an emergency fund in an easy access account that you can withdraw when needed.

Whatever account you choose, it’s important to review your savings and take action to make sure you’re getting the best possible return on your money.