Fixed-rate bonds cheer up savers

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The Independent Online

Savers have had little to shout about in 2006, with a succession of cuts in the interest paid on their accounts, despite a static Bank of England base rate.

However, provided they are happy to put their money away for a minimum of 12 months without access, some brighter news could be on its way.

The fixed-rate savings bond market - where you leave your money with a provider for between one and five years - has benefited from a flurry of industry activity over the past week, and interest rates have now edged over the 5 per cent mark.

While rates had been hovering around 4.8 per cent, they shot up last week when the Heritable Bank hiked the deal on its five-year bond by 0.5 percentage points to 5.25 per cent.

The Derbyshire and Leeds building societies quickly followed suit, both launching new bonds offering well over 5 per cent, though for shorter periods. Derbyshire unveiled a new three-year deal at 5.15 per cent, and a two-year one at 5.1 per cent, while Leeds introduced a two-year bond at 5.1 per cent.

Rachel Thrussell of the financial analyst Moneyfacts says the moves are down to rising "swap rates" - the rates at which banks and others lend to each other - for longer-term money. "While this has meant that fixed-rate mortgages have become more expensive, it's good news for savers."

Norwich & Peterborough building society has also notched up its two-year and three-year bonds from 4.75 to 5 per cent, and its five-year bond from 4.65 to 5 per cent.

Birmingham Midshires has just edged up the rate on its one-year bond from 4.9 to 5.01 per cent, while last week the Portman and Yorkshire building societies increased their two-year bonds to 5 per cent (from 4.75 and 4.8 per cent respectively).

Savings specialists say fixed-rate bonds are definitely worth considering at present - provided you don't need instant access to your cash.

Fixes give you the peace of mind of knowing exactly how much interest you'll earn each year, says Sue Hannums from independent financial adviser Chase de Vere.

"Fixed rates generally give a higher rate for locking your money away - but I would not recommend locking in for more than three years or you could find yourself with an uncompetitive deal."

If you do opt for a fixed-rate bond, be aware that you can face a stiff penalty if you need to get access to your cash - up to six months of interest, warns Ms Thrussell.

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