A 2 year fixed rate bond works on the basis that the customer commits a set amount of money to the agreement over a 2 year period. Once this period is up, the customer is then allowed to collect their investment along with the accrued interest that has built up.
It is important to remember however that unlike many other types of savings accounts, money that is invested into a 2 year fixed rate bond may usually not be accessed by the customers until the period has come to a close. Customers should therefore consider their financial situation before committing to an agreement of this nature.
Compared with somr other types of fixed rate bonds, a 2 year product may be considered to be a relatively short term option. Although their interest rates may not be quite as high as those offering longer terms, customers may be provided with the relative freedom of quicker access to their money compared to a longer, 5 year agreement, for example.
A 2 year fixed rate bond may also be offered with several different options and benefits. Some providers may offer this product with what are known as tiered interest rates. This allows customers who can deposit the highest amounts to earn higher interest rates.
Fixed Rate Bonds – Our view
What are 2 year fixed rate bonds?
2 Year fixed rate bonds are a form of savings account which offer you a guaranteed interest payment over 24 months.
Advantages
- The interest rate offered is guaranteed for the 2 year term of the bond. This is unlike instant access savings accounts where the interest rate can go down or up at short notice.
- Different banks and building societies will have different views on medium to long term interest rates. If interest rates rise more slowly than expected a fixed rate bond may give you a better return than what you could expect from an instant access account.
- Some fixed rate bonds provide flexibility e.g. 1 withdrawal over the term.
- Fixed rate bonds range from 2 months to 5 years in duration so you can choose a term that suits your circumstances
- Many fixed rate bond providers offer online access so you can see how much interest you are earning.
Disadvantages
- The benefit of enjoying a higher rate of interest must be weighed against tying up your capital for a fixed term. If you need access to your capital before maturity this may not be possible and if it is there may be interest penalties.
- If interest rates rise over the term of the investment you may find the interest rate on your capital is no longer competitive compared to new offerings in the market.
- Many fixed rate bond providers require a high minimum deposit e.g. £5,000