What is a Fixed Rate Bond?
What is a Fixed Rate Bond?
A fixed rate bond is a savings account that pays a guaranteed rate of interest for a set period of time.
The interest rate is fixed when the account is opened, which means it will not change during the agreed term. This gives savers certainty over the rate they will receive, provided the money remains in the account until maturity.
Fixed rate bonds are often used by savers who have a lump sum they do not need immediate access to. In return for locking money away for a fixed period, the account may offer a more competitive rate than some easy access savings accounts.
At Monmouthshire Building Society, fixed rate bonds are available for eligible savers who want a fixed return over a set term and are comfortable leaving their money untouched until the account matures.
How does a fixed rate bond work?
A fixed rate bond works by allowing money to be deposited for a specific length of time, known as the fixed term.
Once the account is opened, the interest rate is fixed for that term. This means the rate will not go up or down, even if wider savings rates change.
The term can vary depending on the product. Some fixed rate bonds may run for one year, while others may run for longer. The provider will set out the account’s interest rate, term, minimum deposit, maximum balance, interest payment options and access rules before the account is opened.
Fixed rate bonds are usually designed for lump sum savings. Some providers may allow additional deposits for a limited period, but this depends on the account terms.
When the fixed term ends, the account reaches maturity. At this point, the saver will usually be given options, such as withdrawing the money, transferring it to another savings account, or opening a new fixed rate product.
Fixed rate bond example
For illustrative purposes, a simple fixed rate bond example would be a saver placing £1,000 into a one-year fixed rate bond with a fixed interest rate of 4.00% AER/Gross.
If no further money is added and the money remains in the account for the full year, the estimated balance at maturity would be £1,040.
This is only an example. Actual returns depend on the account balance, interest rate, term length, how interest is calculated and the specific terms of the account.
Before opening a fixed rate bond, savers should always read the product summary box and terms and conditions.
View our 1 Year Fixed Rate Bond
Benefits of fixed rate bonds
The main benefit of a fixed rate bond is certainty.
Because the interest rate is fixed, savers know what rate they will receive for the full term. This can make it easier to plan ahead, especially when saving for a future cost or financial goal.
Fixed rate bonds may also offer a competitive rate compared with some instant access accounts. This is because the saver is agreeing to leave the money in the account for a set period.
- Fixed rate bonds can be suitable for people who:
- Have a lump sum available to save.
- Do not need immediate access to the money.
- Want a guaranteed interest rate.
- Prefer a known return over a fixed period.
- Are saving towards a planned future expense.
What are the drawbacks of fixed rate bonds
The main drawback of a fixed rate bond is limited access.
Fixed rate bonds are designed for money that can be left untouched until the end of the term. If a saver may need access to their money, an instant access or notice account may be more suitable.
Another consideration is that savings rates can change. If market rates rise after a saver opens a fixed rate bond, the rate on that bond will usually stay the same until maturity. This provides certainty, but it also means the saver may not benefit if better rates become available elsewhere.
Savers should also consider inflation. If inflation is higher than the interest rate being earned, the money may lose purchasing power in real terms, even though the account balance increases.
Can you withdraw money from a fixed rate bond?
This depends on the provider and the specific account terms.
Some fixed rate bonds may allow early access with a penalty. Others do not allow withdrawals until the account reaches maturity.
With Monmouthshire Building Society fixed rate bonds, withdrawals are not permitted until maturity. This means the account should only be opened with money that will not be needed during the fixed term.
Savers should always check the access rules before applying.
Are fixed rate bonds tax-free?
Fixed rate bonds are not automatically tax-free.
Interest earned on a standard fixed rate bond is usually paid gross, which means before tax. Whether tax is payable depends on the saver’s personal circumstances, total income and the amount of savings interest earned during the tax year.
Some savers may be able to earn interest without paying tax because of the Personal Savings Allowance. However, this depends on your personal circumstances and may change. For current information, see HMRC guidance Tax on savings interest: How much tax you pay - GOV.UK.
Cash ISAs are different. Interest earned within a Cash ISA is tax-free, subject to ISA rules and annual subscription limits.
For savers specifically looking for tax-free savings, a Cash ISA may be worth considering.
Fixed rate bonds vs other savings accounts
Fixed rate bonds are one of several savings account options.
- An instant access savings account allows savers to withdraw money when needed. This can make it useful for emergency savings or money that may be required at short notice.
- A notice account usually allows withdrawals after a set notice period. This may suit savers who want some access to their money but do not need it immediately.
A fixed rate bond offers less flexibility, but provides a guaranteed rate for a set term. This can suit savers who are confident they will not need access to the money before maturity.
The right option depends on the saver’s goals, timescale and need for access.
View all of our personal savings accounts
What happens when a fixed rate bond matures?
When a fixed rate bond matures, the fixed term comes to an end.
The provider will usually contact the saver before maturity to explain the available options. These may include withdrawing the money, transferring it to another savings account, or opening a new fixed rate bond.
It is important to review the options before maturity. If no instructions are given, the provider may move the balance into another account in line with the product terms.
Are fixed rate bonds safe?
Fixed rate bonds from UK-authorised banks and building societies are cash savings products.
Eligible deposits with UK-authorised banks and building societies are protected by the Financial Services Compensation Scheme, up to the applicable limit per eligible person, per authorised firm.
This protection applies if the authorised firm fails and cannot return customers’ eligible deposits.
Savers should remember that FSCS protection applies per authorised firm, not necessarily per brand. If money is held with more than one brand under the same banking licence, the protection limit may apply across those brands together.
Is a fixed rate bond right for you?
A fixed rate bond may be suitable for savers who want a guaranteed interest rate and have money they can leave untouched for the full term.
It may not be suitable for savers who need easy access to their money, are still building an emergency fund, or are unsure whether they can commit the funds for the full period.
Before choosing a fixed rate bond, savers should consider:
- The minimum opening balance.
- The maximum balance.
- The fixed term.
- The interest rate.
- When interest is paid.
- Whether withdrawals are allowed.
- Whether further deposits are allowed.
- How the account can be opened and managed.
- What happens at maturity.
Explore fixed rate bonds with Monmouthshire Building Society
Monmouthshire Building Society offers fixed rate bond options for eligible savers who want to put away a lump sum for a set period and know what rate they will receive.
Before applying, savers should read the product summary box and terms and conditions carefully to make sure the account is suitable.