Best 2 Year Fixed Rate Bonds

A guide to two-year fixed rate bonds

How does a two-year fixed rate bond work?

Like most fixed savings accounts, a two-year bond requires you to lock away your funds for a given amount of time. In return, providers offer interest rates that are guaranteed not to change for the duration of the term.

Some two-year fixed rate bonds can be applied for with as little as just £1, while others specify a more significant deposit of £10,000 or more. Although usually you won’t be able to withdraw from this amount, some providers may allow you to add to your savings pot for a short period after opening.

^*Recent volatility means the gap between fixed and variable accounts has narrowed. In some instances, this has resulted in the rates offered by easy access and notice accounts outperforming those paid by fixed accounts.

Key considerations before opening a two-year fixed rate bond

If you’re on the fence about opening a two-year fixed rate bond, here are some key points to consider:

Savings goals - Knowing what your savings goals are is incredibly important when deciding which account is right for you. While an easy access account allows you to make withdrawals on short notice, fixed bonds can be useful for saving long-term, offering you guaranteed returns on your investment - though this means waiting the full term before being granted access.

How often interest is paid - Many fixed bonds (including two-year accounts) give you the choice of how often your interest is paid. This can usually be either monthly, quarterly, yearly or on anniversary. Alternatively, some options pay returns on maturity (when the term is complete), at which point you’ll also gain access to the money held in the account.

How to compare two-year fixed rate bonds

One of the most important ways to compare the best two-year fixed bonds is the interest rate, which ultimately decides how much you’ll earn over the course of your investment. However, also make sure to consider if there are any specific requirements such as a linked current account or use of an authenticator app.

What’s more, some accounts can include additional features, which may be worth paying attention to. This could include the ability to add to your pot for a limited time.

Our ‘full search’ tool on our charts can help you compare other aspects of an account, including how it can be opened and managed as well as how often interest is paid.

Are fixed rate bonds a good investment right now?

Determining whether fixed-rate bonds are a good investment can depend on several factors beyond your personal finance goals, including:

Interest rates

Staying in the loop on the latest interest rates is crucial when deciding when to open a fixed bond, as this ultimately decides how much you’ll earn on your investment. You can use the filters on the chart above to sort by rate order to see what account is currently offering the highest returns.

Base rate

The Bank of England’s Monetary Policy Committee (MPC) oversees the base rate, which is the central interest rate for the UK. The MPC meets eight times a year, when it decides to lower, raise or maintain the current rate based on prevailing economic factors, including inflation. While it has a considerable influence over variable rates, a change to the base rate can eventually trickle down to the fixed market. At the time of writing, the MPC is currently holding the UK’s central interest rate at 4.25% to help control inflation, which sits above the Government’s 2% target.

Inflation

It’s worth factoring in the rate of inflation when deciding to invest in a fixed bond. High rates of inflation can lead to the base rate being held or increased to manage the rise, which may be good for securing higher returns, but can lead to your earnings being worth less over the fixed term.

Tax implications for two-year bonds

As with any non-ISA savings account, basic-rate taxpayers are entitled to £1,000 in interest each tax-year before having to pay tax as part of their Personal Savings Allowance (PSA). This limit then falls to £500 and £0 for higher-rate and additional-rate taxpayers respectively.

While this may be plenty for some savers, those with larger investments risk breaching their allowance, especially when locking their money away for longer periods thanks to the effects of compounding interest.

For example, say you invested a £10,000 lump sum into a two-year bond paying 5.00% AER yearly with interest compounded. After the first year, you’d earn £500 in interest which, for the basic-rate taxpayer, is already half of their allowance for that year. However, by the end of the next year, you’d earn £525, eating up more of your PSA during that second year.

Is a two-year bond safe?

When comparing two-year fixed rate bonds using our chart, you can be sure your savings are safe in any account that displays the ‘FSCS Protected’ badge in the right-hand corner of the listing.

The Financial Services Compensation Scheme (FSCS) protects funds up to £85,000 should a provider go bust. However, it’s important to note this amount applies to any money held under one banking licence and not per account.

You can find out which banks and building societies share a banking licence with our guide to who owns whom. To check if your money’s protected, visit the FSCS website.

What happens if the bank with my two-year fixed rate bond goes bankrupt?

As previously mentioned, the FSCS protects up to £85,000 of your funds (held with a single banking licence) in the event that your provider goes bankrupt.

Note, you won’t be covered if the provider wasn’t authorised by the Financial Conduct Authority (FCA) or the Prudential Regulation Authority (PRA).

What is the best 2 year fixed rate bond in the UK?

Currently, the best 2 year fixed rate bonds pay over 4.40% AER, though be sure to check the chart above for the latest rates.

Unfortunately, it’s difficult to quantify the best 2 year fixed rate savings option as what you may be looking for in an account might not be suitable for other savers. It’s therefore worth considering:

• The interest rate, including how frequently returns are paid
• The minimum deposit, and if you can add to your initial investment after opening
• If there are any specific opening requirements
• How the account can be opened and managed

How do I apply for a two-year fixed rate bond?

These days, providers offer a variety of ways to both open and manage their savings accounts. As a result, you’ll be able to apply for a two-year fixed rate bond through a combination of the following options:

• Online
• In branch
• By post
• By phone
• Via mobile app

Keep an eye on how an account operates beforehand, however, as some may have different management options compared to how they were originally opened, so make sure you’re happy with both before applying.

What is the minimum deposit for a two-year fixed rate bond?

As with other fixed accounts, two-year bonds typically require a minimum deposit when opening, which can typically range anywhere from £1,000 to £25,000. Note, a larger opening amount won’t necessarily mean a higher rate and varies between providers.

As adding to a fixed bond is usually restricted, your initial investment is something that must be carefully considered. Be mindful not to lock away more than you can afford as you won’t be able to withdraw these funds until the two years are up.

What happens if I need to access my funds before the two years are up?

The majority of two-year bonds prohibit early access, and the few that do will likely enforce a penalty as a result. Normally this means losing out on a portion of your interest earnings, so it’s vital to consider if you’ll need to access your cash before locking it away.

What happens when a fixed-rate bond matures?

Like with any fixed account, when a two-year bond is approaching the end of its term your provider will contact you to discuss what happens next.

At this point you could decide to withdraw your money or reinvest it into another account. If your account pays interest on maturity, your provider will also pay you the earnings you have accumulated over the two years.

It’s important to note that if you don’t specify your instructions, the provider may place your money back into a similar fixed account.

How do interest rates on two-year fixed rate bonds compare to other savings accounts?

Traditionally, longer fixed terms yielded higher returns than shorter-term counterparts, however, in recent years this has changed.

At the time of writing, two-year bonds pay slightly lower rates than a one-year bond but typically out-perform three- and five-year accounts, though this can vary between accounts.

In comparison to the wider savings market, higher returns can be found with variable accounts, though keep in mind these rates are susceptible to change, unlike fixed bonds.

What’s the best 2 year fixed rate bond for the over-60s?

If you’re over the age of 60 and on the verge of retiring, you may find yourself looking for greater stability from your savings to help support you in your later years.

If you’re considering a two-year bond to help with this, keep in mind the following:

Monthly interest accounts - Though you wouldn’t be able to access your funds until the end of the term, a monthly paying account could be used to supplement income from your pension.

Accounts that can operate via conventional means – If you prefer to visit your bank to manage your finances, you can use our chart above to filter for bonds that can operate via branch.

Two-year fixed bond alternatives

If you gain enough interest to be at risk of breaching your PSA, you may want to consider a two-year fixed rate ISA as an alternative to a two-year bond. With this type of account, any interest earned is automatically exempt from being taxed.

Meanwhile, if it’s likely you’ll need to dip into your savings in the near future, you could opt for an easy access savings account or notice account instead.

What other fixed terms are available?

There are many different fixed terms available to suit a variety of needs and savings goals; these can range anywhere from bonds of less than one-year to bonds of five years or more.

If you’re interested in two-year bonds, why not also consider terms of a similar length, such as a one-year bond, 18-month bond or three-year bond?

Can I have more than one fixed rate bond?

Yes, you can open as many fixed bonds as you like, though keep in mind this could mean locking away more of your money.

If you are interested in having more than one fixed term on the go, you may wish to consider laddering your bonds. This is where you spread your savings across various fixed terms (usually in ascending order of term length) giving you regular cash flow as each bond matures. This could be used to bolster your income or re-invested into new bonds to continue growing your savings.

Note that laddering requires keeping a close eye on your savings, so you’re always aware of when each term matures. Furthermore, if you plan to re-invest, there is always the risk that rates could be lower than when you originally opened the accounts.