Fresh option for savers as fixed bonds hit 6 per cent

Many savers are still waiting to see if their providers are going to increase their interest rates in line with this month's quarter-point base-rate rise to 5.25 per cent. A number of banks and building societies have been slow to respond.

But elsewhere in the savings market there is brighter news: fixed-rate bonds are making a comeback with the highest returns seen in years.

For some time now, savings specialists have been expecting fixed-rate deals to hit the 6 per cent mark, and 10 days ago Birmingham Midshires launched a one-year bond paying 6.05 per cent.

The bond, which became available on 20 January, requires a minimum investment of just £1.

Since then, Stroud & Swindon building society has also launched a one-year fixed-rate bond at 6 per cent. However, this Ebond, available online, requires a far higher minimum balance of £5,000.

Yesterday, Chelsea building society pitched in with a two-year fixed-rate bond at 5.9 per cent, on a deposit of at least £1,000.

"Rates approaching 6 per cent have not been available on fixed-rate bonds for some years," says Lisa Taylor from financial analyst Moneyfacts.

"A few came close in 2004 but they have not been widely available since October 2001."

Fixed deals - which pay a guaranteed rate of interest for the term of the account - will appeal to those savers who are happy to tie up their money for between one and five years.

"They are good for people with a reasonable amount of money or a lump sum to tuck away for a set period," says Ms Taylor.

On the flip side, onerous penalties make them unsuitable for those who may need to draw on the funds at any point. Doing this often means forfeiting the equivalent of a third of a year's interest.

Fixes are not linked to the base rate but to swap rates - the cost to lenders of borrowing from one another, based on the market's expectation for interest movements over a set period.

Ms Taylor explains that as shorter-term swap rates are higher than longer-term ones at the moment, short- term fixed bonds currently offer the best deal.

For three years, Heritable Bank offers 5.76 per cent; for four- and five-year fixes, the Halifax offers 5.65 per cent and 5.63 per cent respectively.