Some one-year fixed rate bonds pay more than five-year deals
A general rule of thumb is the longer you tie up your cash, the higher the rate of interest.
However, this no longer seems the case as the difference between the rate on a one-year and a five-year fixed term deal has plummeted to nearly nothing, with some short-term accounts paying better rates.
Figures from Moneyfacts show the average one-year fixed account pays 0.94%, while the average five-year fixed offers 1.33% – a difference of just 0.39%.
In January 2016, the difference was 1.17%.
The same pattern has emerged in the cash ISA market, where the difference between a one- and five-year deal has fallen from 0.94% in early 2016 to 0.42% today.
A host of providers are paying just 1% on their five-year fixed accounts, including Skipton Building Society, Sainsbury’s Bank and Tesco Bank.
However, you can get as much as 1.45% on a one-year deal from Bank of London and The Middle East or 1.4% from Atom Bank.
Elsewhere, ICICI Bank UK and OakNorth Bank pay 1.35% and 1.3% respectively on their one-year bonds.
Rachel Springall, finance expert at Moneyfacts, said: “The difference in rate offered on one-year and five-year bonds has fallen by two thirds between January 2016 and today which is a huge change. This means there is less incentive for savers to choose a five-year bond over a one-year option.
“In light of these developments, savers may well be rushing to secure a competitive rate over the next 12 months before rates worsen, and as it stands there may be less demand for long-term bonds as the months progress.”
Springall does not expect rates on longer term products to improve any time soon.
“Unless savings providers need to use savers’ deposits to fund their future lending, rates are not expected to improve drastically any time soon, so a good deal may not last very long if it becomes filled quickly,” she said.