Published: 12/08/2009

It was less than three months ago that we were getting excited to see interest rates starting to break the 4% barrier on fixed rate savings bonds.

Well things have moved on quite nicely since then and we've now reached the stage where there are some accounts now paying well above 5% for longer term deposits.

In the last couple of weeks here at Moneynet we've seen some of the banks and building societies battling it out to offer the best rates and attract much needed savings balances from the general public.

This intense competition to offer the top rate is good news for savers as rates continue to edge upwards - here's hoping that the trend continues!

So what is a fixed rate bond? - The word bond can be a bit confusing and some people assume that it is associated with investments in stocks and shares, but I can assure you that's not the case.

A fixed rate bond is just a cash savings account where you receive a fixed rate of interest for the term of your investment. You will find that most bonds are for a term of between 1 and 5 years although there are also a few for 6 or 9 months if you look hard enough.

Many of the fixed rate bonds currently on offer give you the option to receive your interest on a monthly basis, a great way to boost your income if you're finding it a struggle to make ends meet.

Some of the best deals around at the moment are:

At the shorter end of the scale, West Bromwich Building Society are paying a one year ‘best buy’ rate of 3.90% fixed from £5,000, closely followed by Post Office at 3.85% fixed for a 12 month term with a minimum deposit of £500 required.

By putting your savings away for an even longer term you will be rewarded with yet higher returns. For example Barnsley Building Society is paying 5.15% for 4 years and 5.40% for 5 years with a minimum opening balance of just £100 needed to open an account.

You can find the full range of bonds currently available via the Moneynet banking and savings search here.

So what are the downsides of fixed rate bonds?

Firstly you must be sure that you are able to tie your money up for the term of the bond, as in most cases there are no withdrawals permitted until it matures. It's always best to keep some of your savings in an instant access account for emergencies and then put the rest into a bond for a term that suits your circumstances.

Another potential issue is knowing how long to tie your money up for. Whilst there are rates of 5.40% payable if you put your cash away for five years, rates may still increase further- but no one knows for sure what will happen a few months further down the line.

The other thing to bear in mind with fixed rate bonds is that the same guarantee from the Financial Services Compensation Scheme of £50,000 per registered institution applies, so if you've got a larger sum, it may be worth spreading your money between providers if you're looking for absolute peace of mind.

So whilst we've highlighted a couple of the minor potential downsides, when you realise that many instant access accounts are paying a miserly 0.1% and the very best barely managing 3%, then it's plain to see why fixed rate bonds are worth some serious consideration.

If you can get double your rate of interest and are confident that you won't need to have access to your money for a year or more, then it certainly makes sense to make your money work harder with a fixed rate bond.

By the way, if you're one of those with an instant access savings account that I mentioned that's paying you virtually nothing, you may be interested to learn that Sainsbury's Bank is currently offering a cracking rate of 2.90% plus 1,000 free nectar points with its Internet Saver account if you apply before 22nd August - click here to find out more.

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