Finance Fundamentals: Investment Theory and Practice

Variable rate and fixed rate savings products

RYAN: There are so many ways to save. Jonquil, I'm really not sure where to start. How about this

account? It's called a 'term bond', but look, the interest rate is quite a bit higher than on the other

accounts.

JONQUIL:

Well, it depends when you think you'll need your money back, Ryan. Some savings products, like
this term bond, lock you in for a fixed period of say, 2, 3 or 5 years. That interest rate is fixed for
the full period. It often is higher than you'd get on other accounts, but the drawback is you can't
usually get your money back early, or if you can there's a hefty charge such as loss of 90 days'
interest.

RYAN:

Right, this bond has a 3-year term, so I'd get that interest rate fixed for the whole 3 years? That's a
good deal isn't it?

JONQUIL:

It could be, if interest rates on other accounts stay the same or fall. But if you think interest rates
will rise, you'll be locked into that fixed rate and it might not look so good after a while.

RYAN:

Maybe not for me then, and look, it says that interest rate is paid out monthly. I really want an
account where I can just leave my money to grow.

JONQUIL:

Yes, some of these fixed term savings products pay out the interest at regular intervals, usually
monthly. That's especially useful for people who need a regular income, like pensioners, but not so
good for you. If your interest is re-invested, your savings will grow faster, and there'll be more to
pay out at the end. That's the magic of compound interest.

RYAN:

I like that, the 'magic of compound interest'. I definitely want to see my money grow, but I don't

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want to see myself locked into a fixed interest rate that might fall behind other accounts. What else
could I look at?

JONQUIL:
Have you thought about maybe a tracker account?

RYAN:
A tracker account? What's that?

JONQUIL:

With many accounts, the rate of interest varies when the Bank of England changes its official
interest rate or 'Bank Rate' as it's known.

RYAN:
Oh yes, I've heard about Bank Rate on the news.

JONQUIL:
That's right. So, tracker accounts are a type of variable rate savings account.

RYAN:

Variable rate?

JONQUIL:
Yup. Variable rate simply means the interest rate tends to change over time. The changes are
broadly in response to changes in Bank Rate, though variable savings rates are sometimes quick
to fall but slow to rise. With a tracker account, there is a specific link to Bank Rate. That means if
Bank Rate goes up, so does the interest rate on your account. Of course, if Bank Rate goes down,
then your interest rate falls.

RYAN:
And do these variable rate accounts have penalties if I want my money back?

JONQUIL:
They do if they're notice accounts. So, those are accounts that typically pay a slightly higher

interest rate, and you have to give the bank or building society a specified notice period for
withdrawal - say 30 days or 90 days - otherwise you lose some interest, though some accounts
may give you one or two penalty-free withdrawals every year. But there are plenty of instant
access accounts that let you take your money out whenever you like without any penalty at all.

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They're especially suitable if you're looking for a home for your rainy day savings, and the market
for instant access accounts is pretty competitive, so sometimes they give you a better interest
rate than notice accounts anyway.

RYAN:
That's all great advice, thank you so much Jonquil.