Savers buy short-term bonds when interest rates rise – but beware of liabilities

More and more savers are taking out fixed-income bonds with unusual maturities, such as six, nine or 18 months – but the terms of irregular deals can trip many consumers.

Most savers opt for full-year bonds, with the most popular being one-year deals. But experts say consumers are increasingly turning to bonds with less popular maturities.

This is due to fierce competition for interest rates from savings providers for once-overlooked bonds of unusual lengths.

For example, currently two of the top five two-year bonds have maturities of 18 months.

One-and-a-half-year deals from OakNorth and Ford Money both pay 6.05 percent interest, nearly as much as the top two-year offer, a 6.10 percent deal from Recognise.

According to Anna Bowes, co-founder of Savings Champion, it’s been common since June to see bonds with historically unpopular maturities at the top of best-buy charts.

Providers are raising interest rates on irregular-maturity bonds, partly because of fierce competition for full-year bonds, and also as a marketing tactic.

Bowes said: ‘More providers are paying higher rates for shorter terms. The competition has been absolutely cutthroat.

“I think another reason could be that it stands out. They can say things like ‘we have the market-leading 18-month bond’, which is good for them.”

Another reason for the rise in unusual bond terms is that providers believe the Bank of England could halt its relentless series of base rate hikes.

The Bank has raised the base rate to tackle high inflation, but it has also led to much better returns for savers.

But for providers, if the base rate drops, there’s risk in selling fixed-rate deals, especially those with longer terms, meaning shorter-term products appear more attractive.

What to watch out for

The move to bonds with unusual terms brings with it two potential pitfalls that consumers should be aware of.

The first is that it can be tricky to track down these deals. Because they are not normally popular, six-month and nine-month deals are often not listed separately on savings websites and are often lumped in with one-year deals. Likewise, 15- and 18-month deals are bundled with two-year options.

The second problem is that it’s harder to calculate how much interest you’ll get on shorter-term deals, since savings companies list interest rates for an entire year, even if a product has a shorter life.

A saver with £1,000 could earn £60.10 from the best one-year fixed rate bond, from Smartsave, with an interest rate of 6.01 per cent.

By comparison, the highest nine-month bond, from Beehive Money, pays 5.65 percent interest per annum.

In other words, on the face of it, it seems possible to make £56.50 with Beehive, just £3.10 less than with Smart Save – all to lock in your money 25 per cent faster.

That seems like a fair trade-off. But of course that’s not quite right, because the rate of 5.65 percent is an annual interest rate, while the Beehive deal only lasts nine months.

Calculated monthly, our example saver with £1,000 would earn £45.66 interest after nine months with Beehive – £14.44 less than with Smart Save, or a difference of 31 per cent.

While this will be mentioned in the fine print of fixed rate bonds, it’s easy to miss it.

Bowes said, “You have to look closely at the summary box to avoid disappointment, which will be even greater if you put a lump sum under lock and key for a long time.”