Interest rate fall to hit short-term fixed-rate bonds

10 June 2009

Savers who have been enjoying generous fixed-rate bonds could soon be facing big reductions in the level of their returns.

Many one-year fixed-rate bonds were offering interest rates as high as 8 per cent just 12 months ago.

But with these bonds now maturing, savers could see interest rates plunge to as low as 0.1 per cent.

The Bank of England’s heavy cutting of base interest rates has meant that, as opposed to just a year back, banks and building societies are unable or unwilling to deliver such competitive fixed-rate savings and investment deals.

Kevin Mountford, head of banking at financial website moneysupermarket.com, said: “Until now some savers will have been somewhat sheltered from the low rate environment, with their cash locked away generating excellent returns. But these savers are about to come down to earth with a bump. It will be interesting to see whether or not these savers look to riskier investments, such as equities backed vehicles, in order to maintain returns.”

Mr Mountford went on to say: “The golden rule for anyone coming to the end of their fixed rate bond deal is to pay attention to the rate they are getting on maturity, and switch to a new deal as soon as the interest rate drops off. If they allow their cash to languish in poorly paying accounts it could cost them hundreds of pounds in lost interest every year.”