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Building societies shift to short-term fix

SAVERS looking for a safe haven for their cash are being tempted by a range of building society funds where the interest paid is fixed over a period of time.

Unlike nine months ago, however, when the most popular savings schemes tended to be five-year, fixed-rate products, they are now often for two years.

Among the top rates available at present is one from Coventry Building Society, whose two-year bond pays an annual income of 8.4 per cent gross on savings above £40,000. Those who want monthly income receive 8.05 per cent gross.

Martin Ritchley, chief executive at Coventry Building Society, said of the switch in popularity: "The money markets are predicting further interest rate rises over the next couple of years, reflecting a perception of where inflation is likely to go.

"A year ago, base rates were lower. Savers wanted an immediate improvement and were prepared to tie their money up for a longer period to achieve it.

"Now, they are more likely to say that five years is too long and uncertain a period of time for them to want to tie their money up. We have to reflect what the customer wants."

Woolwich Building Society has also entered the market with its own two- year bond. It pays a slightly lower annual income of 8.25 per cent gross, or 7.95 per cent monthly. But unlike the Coventry's, the Woolwich bond pays the same rate on a minimum investment of £500.

Jeff Mendzil, marketing development manager at the Woolwich, said: "The rates available in the money markets are not substantially higher over two years than for a longer period.

"This reflects uncertainty over the long-term prospects for the economy, including the forthcoming general election.

"It also reflects a slightly different point in the economic cycle. A year ago, the expectation was for rising interest rates and it was possible to offer a higher savings rate.

"But we are further along that period now and the feeling is that rates will not go up that much more and may even fall some years from now."

Ian Darby, a director at John Charcol, the mortgage and savings specialist, agrees. He says: "There is also the perception among savers that the penalties for withdrawing money from the five-year schemes are high.

"For mortgages, a similar position applies. Most of the business at present is on remortgages. We are advising people to go for two-year fixes and discounts. This is because it is possible at the moment to go for a two- year fix that is as low as 5.75 per cent.

"By comparison, a five-year fixed mortgage is about 9 per cent. Peace of mind means that borrowers are being asked to pay 3.25 per cent extra a year for several years."

Among the fixed mortgages on offer this week is Bristol & West's two- year deal at 5.75 per cent, which has a three month redemption penalty in year one and one month thereafter. B&W also offers a 3.35 per cent discount on its 8.44 per cent variable rate for two years.

Northern Rock is offering a 6.24 per cent discount on its 8.54 per cent variable rate mortgage until May 1996.

Mr Darby said: "If rates remain more or less where they are now, a discount is probably more advisable. If they rise by a significant amount, a fix is preferable."