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Should you fix your savings for six months?
One-year bonds are usually the first choice for savvy savers looking for a decent short-term home for their cash, but Which? has found that the very best rates are currently on accounts lasting six months.
Our analysis of Moneyfacts data shows that 68% of these accounts can beat May's average for a one-year fix of 4.58% AER. In addition, 90% of six-month bonds smash the average rate of 4.12% offered by accounts lasting more than 12 months.
Here, Which? takes a closer look at what's happening to the savings market and whether opening a super-short-term account is worth it.
Six-month bonds offer the best rates
The past couple of years have seen interest on fixed bonds skyrocket but, although rates are significantly higher than this time last year, they have been steadily dropping since last autumn.
Savers should therefore act fast to grab the best deals before interest rates fall even further.
The table below shows the top six-month fixed savings accounts, ordered by rate:
| Account | AER/EPR | Terms |
|---|---|---|
| Allica Bank 6-Month Fixed Term Savings Account | 5.25% | £10,000 minimum opening deposit |
| Atom Bank 6 Month Fixed Saver | 5.25% | £50 minimum opening deposit |
| Gatehouse Bank 6 Month Fixed Term Woodland Saver* | 5.22% | £1,000 minimum opening deposit |
| ICICI Bank UK SuperSaver Bond | 5.21% | £1,000 minimum opening deposit |
| Zenith Bank (UK) Ltd 6 Month Fixed Term Deposit | 5.18% | £1,000 minimum opening deposit |
Source: Moneyfacts. Correct as of 10 May 2024, but rates are subject to change. *The account from Gatehouse Bank is a Sharia-compliant product, and so offers an expected profit rate (EPR) as opposed to an annual equivalent rate (AER).
If your priority when searching for a savings account is rates alone, then a six-month product is your best bet.
The table shows that four out of five of the top six-month bonds have rates better than the highest one-year deal of 5.2% EPR, available with Al Rayan Bank through savings platform Raisin. No bond lasting more than a year can match or beat rates offered by the top six-month accounts listed in the table.
- Find out more: how to switch your savings account
Why less now means more
Before the savings boom of the past two years, the general rule of thumb was that the longer you fixed for, the better the returns. That trend has now been turned on its head, with shorter-term bonds promising the best interest.
Providers are currently adjusting rates according to predictions as to what will happen to the Bank of England's base rate in the future.
In other words, banks don't want to be stuck paying savers nearly 5% interest over the next few years if it looks like the base rate is going to drop to less than that well before the account matures.
Mark Hicks, head of Hargreaves Lansdown's Active Savings platform, says the higher rates offered on shorter bonds also suit providers.
He explains: 'Banks need to fund their lending portfolios with savings, so they’ll need savings that mature at a huge number of different times. Shorter fixed rates mean they can be flexible and nimble about this, which is why they appeal to the banks.'
Is a quick fix worth it?
If you only care about getting the best rate, then an account lasting less than a year will suit you. These bonds also appeal to savers who are happy to lock their money away in exchange for a better rate but don't want to commit to a full 12 months.
They may, for example, have cash they’re sitting on to pay a tax bill or for home renovations, and they want to make the most of it before they spend it.
Fixing guarantees you will earn the same amount of interest for the entire period your money is locked away, but the best rate available now may not be around when your bond matures.
Interest rates on fixed-rate accounts are falling, and that trend is likely to continue over the next six months. So if you don’t need the cash for longer than that, you might want to forgo the extra interest in the short term, and fix for the full year or more to secure a great rate for as long as possible.
While rates on shorter-term bonds are higher than other types of fixed account, your choice of product is much more limited. Which? found just 10% of fixed-rate accounts on the market have term lengths less than one year.
Finally, if you need to spend the money sooner rather than later, you might want to consider opening an easy-access account instead. Cynergy Bank currently offers the best rate of 4.95% AER and doesn't place any restrictions on withdrawals. But because rates on these accounts are variable, banks can cut interest with little notice.
- Find out more: best savings accounts
