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Fixed term bonds hit new highs – is now the time to fix?

Top fixed rates have crept over 5% as UK inflation has shaken up the savings market. We look at what could be next for fixed-term rates and how to tailor your cash to work harder for you.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

Duncan Jeffery

Published on 26 May 2023

This article is more than 6 months old

It was correct at the time of publishing. Our views and any references to tax, investment and pension rules may have changed since then.

Fixed-term rates are climbing again.

With the UK’s core inflation at its highest level since February 1997, markets have been quick to react.

High inflation tends to be followed by a high base rate as central banks raise rates to help cool spending by making borrowing more expensive. Savings providers set their rates on where they expect the base rate to be in the future.

Expectations for the Bank of England base rate to hit 5.50% in the coming months have already pushed up fixed term rates, especially on one-year terms.

This isn’t the first-time rates have spiked in the last 12 months. But following the last savings rate peak in November 2022, market expectations for higher base rate in the future calmed down. As a result, the top savings rates started to fall as we entered the new year.

Fast forward to May 2023, market expectations are up again, and rates are spiking to even higher levels than before – but where do they go from here?

This article isn’t personal advice. If you’re not sure what’s right for you, ask for advice.

The future for fixed rates

If market predictions are accurate and the base rate stays higher for longer, savers could lock up their cash in a higher rate down the line.

But those waiting for a better deal need to accept they’re taking a risk.

If the market has miscalculated its base rate prediction, we won’t see any meaningful rise in the rates available to savers. Those waiting for a better deal might never find one, and inflation will erode their spending power in the meantime.

If you’re still waiting for the right time to fix, you should consider what you’re waiting for. It’s important to remember you won’t be able to spot the peak of savings rates until it’s passed and rates begin to drop – at which point it’s too late. It’s worth considering if you’re happy with rates as they stand now.

If beating inflation is your main aim, the fact that it’s expected to drop from 8.7% to below 4% by the end of the year makes a lot of fixed rates look like an attractive option right now.

There’s also the question of the best possible period to fix your savings for.

Usually, you’re rewarded more for fixing for longer. For example, with the current competitive five-year rates so close to two-year rates, you could get similar returns without the five-year commitment.

Although if forecasts are right and we do get rate cuts next year, then when your two-year fixed rate matures, the rates available will be lower. If you won’t need the money for five years, a five-year fix could make sense. Though of course nothing is certain.

Please also remember that fixed term products generally only allow access to funds at maturity.

Don’t forget the emergency pot

Whenever you decide to fix, making sure you have an emergency pot for unexpected costs should be a priority. If you’re considering how much to keep in an easy access product, we suggest you keep three to six months' worth of essential expenses if you’re working, and one to three years' worth if you’re retired.

Finding a competitive easy-access rate will keep your cash working hard while giving you the flexibility to withdraw whenever you want. If you’re looking for a good deal, the average instant access rate currently sits at its highest level in 12 years, so you won’t be short of opportunities.

A savings portfolio – the easy way

If you have enough cash to spread across different products, taking a ‘portfolio’ approach might be worth looking into. Once you’ve secured your emergency savings, the rest can be broken off and fixed for the periods that return the money when you need it. This gets you the highest possible rate for each portion of your cash at the time you lock it in.

Having a savings portfolio with multiple products across different providers can get complicated, but savings platforms like Active Savings allow you to keep an eye on your savings through one online account.

Accessing consistently competitive short and long-term fixed rates, alongside your emergency pot, makes it easy to set up a savings portfolio that’s tailored to your goals.

Rates are offered by our banking partners and Active Savings offers easy access products where withdrawals usually take one working day.

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The Active Savings service is provided by Hargreaves Lansdown Savings Limited (company number 8355960). Hargreaves Lansdown Savings Limited is authorised and regulated by the Financial Conduct Authority (firm reference number 915119). Hargreaves Lansdown Savings Limited is authorised by the Financial Conduct Authority under the Electronic Money Regulations 2011 with firm reference 901007 for the issuing of electronic money.

Hargreaves Lansdown Asset Management Limited and Hargreaves Lansdown Savings Limited are subsidiaries of Hargreaves Lansdown plc (company number 2122142).

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