Compare monthly interest fixed-rate bonds

If you’re wondering what a monthly interest fixed-rate bond is and how it compares to an annual interest fixed-rate bond, you’ve come to the right place.

How do monthly interest fixed-rate bonds work?

Monthly interest fixed-rate bonds pay interest on a monthly basis on a lump sum that you’ve saved up. Fixed-rate bonds require you to lock your lump sum away for a term of between 6 months and 5 years. You won’t usually be able to top up your funds during this time or withdraw any of your cash.

Interest is then paid on the money in your account – in this case, each month. Depending on the terms of the bond you opt for, your interest can either be added to the same account (where it will compound – you’ll earn interest on your interet) or you can have the interest paid to a nominated account (effectively providing a small source of additional monthly income). If your goal is to generate additional monthly income, look for an account which allows the interest to be paid to a separate account that you nominate.

At the end of the fixed term, the bond matures and you can withdraw your savings.

How to compare fixed-rate bonds

When comparing fixed-rate bonds, one of the biggest deciding factors will be how much interest you can earn. But while you’ll want to hunt out the highest interest rate possible, there are a number of other factors that you’ll need to consider. For example:

• The interest rate.
• The minimum deposit requirement. This can vary from £500 to £10,000, so make sure you check whether you have a large enough lump sum to be eligible for the account.
• The option to add more funds. Fixed-rate bonds usually won’t usually allow you to add further funds once you’ve made your initial deposit. However, some fixed-rate bonds will accept further deposits until the bond is removed from sale.
• The length of the term. You can usually choose a fixed-rate bond that lasts 6 months or 1, 2, 3, 4 or 5 years. Carefully consider how long you’re prepared to lock away your money for.
• The penalty fee. It’s also worth checking exactly what the penalty would be if you needed to access your money early. Some bonds won’t permit withdrawals at all, while others might charge a set number of days’ interest.

Is it better to get paid monthly or annually?

Choosing to have interest paid monthly can be a good option if you’re using it to supplement your income. However, remember that with some fixed-rate bonds, you won’t be able to access your interest! Opt for an account where your interest can be “paid away”.

When interest is paid monthly, you benefit more from compounding. This is where you earn interest on the amount deposited, plus interest on the interest. The more regularly this interest is paid to your balance, the faster your savings will grow. Learn more about compounding here. However if you opt for your interest to be “paid away” to a separate account to provide an income, then that interest won’t get the opportunity to compound.

However, bear in mind that annual AERs generally already account for compounding. So a 4% AER bond paid monthly will generate the same return as a 4% AER bond paid annually.

Are fixed-rate bonds a good investment?

Yes, fixed-rate bonds can be a good investment for a number of reasons. For a start, fixed-rate bonds tend to offer higher interest rates than easy access accounts, simply because you’re agreeing to lock away your money for a set time. Generally, the longer you tie up your funds, the higher the interest rate you’ll be offered.

What’s more, fixed-rate bonds tend to offer fixed rates of interest so you can rest assured that your interest rate won’t suddenly drop, as it could with a variable rate account.

However, at a time when interest rates are rising, you need to be wary of locking into a fixed-rate bond for too long. Right now, you could be better off with a 1- or 2-year bond, rather than a 4- or 5-year bond. That’s because if interest rates rise further, you could find yourself locked into an account that is no longer competitive.

Also bear in mind that fixed-rate bonds won’t be suitable if you don’t have a large lump sum to invest as you can’t usually top up your savings during the term.

Pros and cons of fixed-rate bonds

Bottom line

Provided you have a lump sum to invest and you are prepared to leave those funds untouched for a set time, a fixed-rate bond can enable you to earn a competitive, fixed rate of interest and watch your savings grow. Choosing a monthly interest fixed-rate bond also means you’ll benefit more from compounding. Just think carefully about how long you’re happy to lock your money away for.

Frequently asked questions

• How many fixed-rate bonds can I have?

  You can have as many fixed-rate bonds as you like. Certain providers might limit the number of fixed-rate bonds you can hold with them, but you can always open more elsewhere. You can compare a range of fixed-rate bonds here.

• Are fixed-rate bonds safe?

  Yes, if your provider is authorised by the Financial Conduct Authority (FCA) or the Prudential Regulation Authority (PRA) it must protect customer deposits under the Financial Services Compensation Scheme (FSCS).

  This means that up to £85,000 of your money will be protected per person, per banking institution in the event your bank went bust. If this happens, you'll be able to make a claim to the FSCS and get your money back.