Best Fixed Rate Bonds with Monthly Interest

Quick guide to monthly interest fixed rate bonds

A monthly interest savings account pays interest on a monthly basis, which can either be paid into another account or added to the original balance. In a fixed bond you won’t be able to access the money, but can still benefit from your investment, either through compound interest or by securing a regular monthly income from your savings.

It’s always important to make sure your money works as hard as possible, but saving becomes even more vital in a fluctuating market. Read on to find out if monthly interest bonds could be for you – our guide is suitable for beginners as well as those already familiar with bonds, helping you make the right financial choices no matter your knowledge base.

What are monthly interest fixed rate bonds?

Monthly interest fixed rate bonds ask you to lock away a lump sum of money for a set length of time, and in return they pay a fixed rate of interest on a monthly basis. You can choose from a range of terms, from as little as three months to five years or more, giving you plenty of options.

Note that not all fixed rate bonds pay interest monthly; yearly interest payments tend to be more common, but you can easily find those that offer monthly interest by comparing the options in the chart above.

How do monthly interest fixed rate bonds work?

Much like all other fixed rate bonds, those that pay interest monthly will expect you to deposit a lump sum of money that you won’t be able to access until maturity. Some will allow you to make further additions for a limited period, but you’re unlikely to be granted earlier access, so make sure you’re comfortable with your chosen term before committing.

Once deposited, your money will start earning interest, which will be paid on a set day each month. Depending on the terms of the bond, the interest will either be paid into another account – which can provide you with a regular monthly income – or paid back into your savings account, allowing you to benefit from compounding.

However, things can get a little confusing when it comes to the amount of interest you’ll actually earn.

If you have an account paying, say, 4.5% interest, you won’t be earning 4.5% of your balance every single month. Instead, this is the amount you’ll earn over the year; to get an idea of your monthly returns, you need to divide the advertised rate by 12. This is the percentage of your balance that you’ll receive each month. This also means that the gross rate and annual equivalent rate (AER) will be different to account for the compounding effect.

What would the estimated balance be at maturity?

To answer this question, here’s an example.

Let’s assume you want to deposit £20,000 into a five-year bond that pays 4% gross interest. You’ll want to divide 4% by 12 to get your monthly interest rate, which works out at approximately 0.33%.

This means you’d receive £66 in interest for the month.

If you opt to have the money paid away, this is how much would be deposited into your bank account each month, giving you a regular – and predictable – monthly income. This also means that your original savings balance would stay exactly the same, and you’d still have £20,000 at the end of the term after benefiting from five years of regular monthly payments.

However, if you wanted to have the interest paid back into your account, it works a little differently.

Here, the £66 would be added to your £20,000 balance, which means you’d now be earning the same rate of interest on £20,066, giving you £66.62 for the next month – and so on and so forth. This is what’s known as compounding, or earning interest on the original balance plus any interest already accrued.

In this scenario, by the end of the five-year term your £20,000 would have grown by over £4,000, giving you an estimated balance of £24,419.93 at maturity.

_{Disclaimer: This example is based on these exact figures only. Your own returns may be different depending on the amount invested and the savings product chosen.}

Why choose monthly interest fixed rate bonds?

There are several reasons you might choose a monthly interest bond, including:

• Guaranteed income. If you’re choosing to have your interest paid away, you can benefit from a predictable income stream using money you already have.
• Security and stability. Your rate is fixed which means it cannot change during the term of the bond, and because you’re investing in cash, you’re not risking losing money on the stock market.
• Attractive for budgeting. Knowing how much interest will be earnt each month can make it much easier for savers to manage their finances, particularly if they’ll be using it as an income.
• Plenty of options. There are a lot of options to choose from with both short- and long-term bonds available, offering a level of commitment that suits your needs. You can find other monthly interest savings accounts too, including variable rate deals and ISAs (including stocks & shares versions), though returns aren’t guaranteed unless you’ve got a fixed rate.

Key features of monthly interest fixed rate bonds

Fixed rate of interest

The rate is fixed, which means even if market conditions change and rates fall elsewhere, yours will remain unchanged for the term of the bond. This means you’ll be getting guaranteed returns, and because they’re based on a lump sum, you know exactly what those returns will be.

Term lengths

You can choose from a range of different term lengths, from as little as a few months to seven years. This means monthly interest bonds can be used for a whole range of savings goals, but make sure you’re comfortable with the commitment, as you won’t be able to access your money before the bond matures. Bear in mind too that longer terms don’t always mean higher rates, so make sure to compare the options thoroughly.

Minimum investment

Much like all savings accounts, there’ll be a minimum amount you need to deposit. This will vary depending on the provider but is typically around £1,000, and there’s usually a maximum investment amount as well.

Tax considerations

Any interest you earn will be treated as income and taxed accordingly, but you may not have to pay any tax on it. This is because up to £1,000 in interest can be earned tax-free each year (or up to £500 for higher-rate taxpayers), so only interest payments above this level will be taxable. You can find out more in our guide on how your savings are taxed.

Regular income

These bonds can be one of the best options if you are looking for an account which will provide you with a source of extra monthly income. Make sure the account you choose has the option of interest being 'paid away', i.e. paid to your bank account. If an account only compounds the interest, or pays it only when the bond matures, you won't be able to take an income from it.

How to buy monthly interest fixed rate bonds

Where to buy monthly interest fixed rate bonds

You can buy monthly interest fixed rate bonds from a range of different banks and building societies; our chart is a great place to see what’s on offer. You’ll see that a lot of these accounts are available from smaller brands rather than high street names, which often pay higher rates than more mainstream providers. Find out more about these challenger banks in our guide.

Buying process

Much like for any other savings account, you’ll need to apply for a monthly interest bond with the provider. Several of the best deals in our chart above have links that will take you directly to them, and from there all you’ll have to do is fill in an application form, provide the necessary documents (you’ll normally need to show proof of identity and address, for example) and make your deposit.

Eligibility and terms

All bonds will have different eligibility and opening criteria. These can include:

• age restrictions
• minimum and maximum deposit requirements
• location (some building society accounts may only be available to savers in certain postcodes, for example)
• existing customer requirements (some accounts are available exclusively to existing customers of the provider)
• account opening and management options (you may be expected to open and manage the account wholly online, while other providers may ask you to go into the branch)
• further addition and withdrawal restrictions.

How our best monthly interest fixed rate bonds comparison works

Finding the best monthly interest fixed rate bonds with our handy comparison table couldn’t be simpler. Here are the steps you can follow:

• Enter a few details and you’ll be presented with a tailored table of results based on your choices.
• First will be all the ‘direct’ deals where you can apply in an easy, hassle-free way by just clicking on the ‘Go To Provider’s Site’ button.
• Under these are the deals from the rest of the marketplace.
• To reorder the whole table according to top rates instead, just click the 'Rate Order' button at the top of the search table.
• Click on the ‘View Further Details’ wording to get a more in-depth overview of the features of each account, giving you all the information you need to easily compare the options.

How to choose the best monthly interest fixed rate bonds for you

What you consider the ‘best’ monthly interest fixed rate bonds will be as individual as your requirements. However, it goes without saying that you are best advised to look at and compare deals prior to deciding.

The number of monthly interest fixed rate bonds suitable for you will depend on both the term you’re looking for and minimum deposit you are prepared to make, and it’s important to factor in all of your requirements before making your decision. For example, you’ll need to consider:

• how much you’re looking to invest
• how long you’re willing to tie up your money for
• how you want to open and manage the account
• whether you want to have interest compounded or paid away (and whether your preferred account offers that choice).

Once you know what you’re looking for, you can compare the best rates accordingly.

What are the alternatives to fixed rate bonds?

If a fixed rate bond with monthly interest isn’t for you, there are other types of savings account you may want to consider, such as:

• Regular savings accounts: These offer a method of saving that can really kick-start your savings habit and help you reach short-term goals. They’re particularly suitable for those who want to save little and often – rather than earning an income each month, you’re setting aside money each month instead.
• Easy access accounts: These offer more flexibility and allow you to add to and withdraw from your savings as you need, and a lot still offer the chance to receive interest monthly. However, rates can fluctuate which means there’s no guarantee when it comes to returns.
• Notice accounts: These are similar to easy access accounts, except you need to wait a certain number of days before you receive the money you want to withdraw. You’ll be able to find several monthly interest options with notice accounts too.
• Individual Savings Accounts (ISAs): To avoid paying tax on your savings interest regardless of how much you earn, you can deposit up to £20,000 in an ISA per tax-year. There are a range of both fixed and variable rate ISAs available, many of which offer monthly interest, and if you’ve got a higher risk appetite you may want to consider stocks & shares ISAs as well.