High Interest Bonds
What You Need to Know
- A High Interest Bond is a product which allows you to lock away your money with a bank or building society for an agreed period in return for an agreed amount of interest.
- They generally offer higher rates of interest than regular savings products, but require you not to access your money for an agreed period, usually between one and five years.
- There are two main types of High Interest Bonds; Fixed Rate Bonds, which pay an agreed rate for the whole duration of the bond, and Trackers, which will pay a variable rate depending on a particular central interest rate.
- High Interest Bonds are a save way to save as you always get your full deposit back, and they are covered by the Government should the bank you are using fail.
- However your deposit will lose value in real terms, and if inflation grows higher than your interest rate, you could end up out of pocket in real terms.
- Some products will allow you to access your money at the payment of a significant penalty, but others offer no means of access at all.
- High Interest Bonds are a big commitment so be sure to research your options carefully and compare different bonds to find the best option for you. Our own comparison page is a good place to start.
What is a High Interest Bond?
A High Interest Bond is a type of savings product commonly offered by banks, building societies, and National Savings and Investments. It works in the same way as a loan from you to the bank or building society who issue the bond. They hold your money, and in return they agree to pay you a set rate of interest every year for the duration of the bond, and then to return your capital to you in full.
They have proved popular over the past few years with savers as they offer a much more generous rate of interest than traditional Savings Accounts do. However there is a catch. They usually require a substantial amount of money to be put into the bond, typically £1,000 is the minimum you will find (although some institutions will accept any amount from £1) and they also require you to agree to lock your money away for a set period, which is usually between one and five years.
If you have this amount of money available, are not going to need to access it for an agreed period, and are looking to save it somewhere risk free, a High Interest Bond is a great option.
What types of High Interest Bonds are there?
There are two main types of High Interest Bond currently available on the market for UK savers.
- Fixed Rate Savings Bonds – These bonds offer a fixed rate of interest over the agreed duration of the bond, meaning you can be sure of the amount of interest you will be earning on your money. The majority of High Interest Bonds in the UK are Fixed Rate Bonds.
- Tracker Bonds – Tracker Bonds offer a variable rate of interest, and will usually track either the Bank of England’s Base Interest Rate, or another index, for the agreed period of time.
Whilst both types of Bond have an appeal at the moment, with interest rates being so low at the moment, if you are looking to put money into a High Interest Bond over a longer period of time, a Tracker Bond might be the more attractive option as indications are that interest rates will rise soon, and they certainly cannot drop any lower than they currently are.
Risks and Returns
High Interest Bonds are usually looked upon as a very safe way of saving your money.
You are guaranteed to get your original deposit back at the end of the agreed term in full, so unlike an investment, there is no risk of losing money in a High Interest Bond.
They also pay a higher rate of interest than a regular savings vehicle, meaning you are getting a better return on your savings than you might do elsewhere. Indeed if you opt for a Fixed Rate Bond, you will know in advance exactly how much money you will make on your savings.
However they are not absolutely perfect. It is important to remember that your original deposit will not hold its value in real terms. Inflation means that the value of your deposit will decline, and if the rate of inflation is ever more than the rate of interest on your bond, it is possible that you could find yourself losing money in real terms.
Many people will also question what will happen to their money should the Bank or Building Society you are saving with close down. These days any deposit of up to £85,000 (dropping to £75,000 next year) is protected and will be returned to you should the financial institution you are saving with collapse. If you are saving more than this amount, be sure to spread it around different institutions to make sure it is all covered.
How long should I sign up for?
High Interest Bonds are available for different lengths of time, but the most common durations are between 1 and 5 years. As a rule, the longer you agree to sign up for, the higher the interest rate you receive will be.
The decision as to how long to sign up for is very much an individual one, and will depend on your own financial circumstances. The first question to ask if how much you want to save in your High Interest Bond. Once you have arrived at a sum you are comfortable with, you need to think ahead and consider if you are likely to have any sizeable expenses coming up in the near future. For example, might be you be looking to buy a property, have a baby, or go on that dream round-the-world holiday?
If you can foresee such an expense, it is probably better to accept a slightly lower interest rate, and lock your money away for a shorter period of time. If not, then a longer period of time will pay more interest for you.
Another consideration, if you are opting for a Fixed Rate Bond, is whether you think rates are likely to improve during the period of your bond. You don’t want to commit your money to a Bond paying 3% for five years now, and find in a years’ time that you could have it in a Bon earning 4% or 5%. DO a bit of research, and if needs be take some financial advice before making your decision.
What if I need to access my money?
The reason High Interest Bonds pay a more favourable rate of interest is that you are agreeing to lock your money away for a set period and not access it.
Should an emergency arise and you have to have the money back, this is always possible, but it usually comes with stiff financial penalties attached. These usually involve docking you a number of days interest (often six months or more) or even closing the account altogether.
But beware, some High Interest Bonds will not have an option to access the money at all, so check the small print before you sign up and be sure that if there is no way of accessing your money, you are comfortable with that.
Comparing High Interest Bonds
Putting your money into a High Interest Bond is a real commitment so it is important to do your research and pick the right product for your needs.
As well as thinking about the amount that you are looking to save, the duration of time you are happy to lock that money away for, and the interest rate you will be earning on your deposit, you should also think about the provider you are going with. Many well-known High Street Banks and Building Societies offer High Interest Bonds, as does National Savings and Investment (the Government Savings Bank), but there are lots of other players in the market as well, including a number of less recognisable overseas institutions.
Many of the less well known institutions offer better deals, so you might be tempted to go with them over a High Street Bank. If that is the case, be sure to look into them carefully and check their terms and conditions. Be sure that if you put your money with them, it will be covered by the Financial Conduct Authority in the event that they shut down too.
A good place to start is our own comparison page, which offers the best deal from a whole host of reputable institutions, both well-known and lesser-known.
- If you don't have a lump sum available, but want to invest gradually over time, why not consider a personal ISA.
Or take a look at our other high interest Savings options.