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Fixed rate vs variable rate savings accounts

Choosing the right account for your savings can make your money work harder and help you reach your goals faster. Many savings accounts come with either a variable interest rate, or fixed interest rate. Understanding the differences between the two is important.

To help, we’ve taken a look at both so you can find the right savings account for you. 

What is a fixed rate savings account?

With a fixed rate savings account you lock away your savings for a set amount of time at a set interest rate. It’s also known as a fixed term bond. You may be able to choose how long your savings are locked away for, or it may be an amount of time set by the bank. This will depend on the fixed rate savings account and provider you choose.

Here are some of the pros and cons of opening a fixed rate savings account.
Advantages
Disadvantages
The interest rate may be higher compared to some instant access savings accounts.
If you access your savings before the end of the term, you may need to pay a fee.
The interest rate is fixed for the term of your account, meaning you know how much you'll earn.
If interest rates rise your rate will remain the same for the rest of the term.
Interest can be paid directly into your account – so you can watch your savings grow.
You will not be able to add savings to your account during the term of the fixed rate.
You won't be able to dip into your savings, so it can reduce the temptation to spend.
You may need to put a minimum amount into a fixed rate savings account to open it.
Here are some of the pros and cons of opening a fixed rate savings account.
Advantages
The interest rate may be higher compared to some instant access savings accounts.
Disadvantages
If you access your savings before the end of the term, you may need to pay a fee.
Advantages
The interest rate is fixed for the term of your account, meaning you know how much you'll earn.
Disadvantages
If interest rates rise your rate will remain the same for the rest of the term.
Advantages
Interest can be paid directly into your account – so you can watch your savings grow.
Disadvantages
You will not be able to add savings to your account during the term of the fixed rate.
Advantages
You won't be able to dip into your savings, so it can reduce the temptation to spend.
Disadvantages
You may need to put a minimum amount into a fixed rate savings account to open it.

What is a variable rate savings account?

A savings account with a variable interest rate means the rate you receive when you open your account can change. Your bank will need to let you know in advance of this happening.

Some variable interest savings accounts can also be easy access, meaning you can dip into your savings if you need to.

Here are some of the pros and cons of opening a variable rate savings account.
Advantages
Disadvantages
Variable rate savings accounts can be flexible – meaning you could move to a different account with better interest.
The variable interest rate on your account can change – meaning it can go up and down.
You may find a wider range of variable interest savings accounts to choose from compared to fixed rate savings accounts. 
As the interest rate can change, you may not be able to plan ahead as accurately when compared to fixed rate savings accounts. 
You can add to your savings whenever you want to keep them growing.
You may be getting a lower rate of interested compared to fixed rate savings accounts.
Here are some of the pros and cons of opening a variable rate savings account.
Advantages
Variable rate savings accounts can be flexible – meaning you could move to a different account with better interest.
Disadvantages
The variable interest rate on your account can change – meaning it can go up and down.
Advantages
You may find a wider range of variable interest savings accounts to choose from compared to fixed rate savings accounts. 
Disadvantages
As the interest rate can change, you may not be able to plan ahead as accurately when compared to fixed rate savings accounts. 
Advantages
You can add to your savings whenever you want to keep them growing.
Disadvantages
You may be getting a lower rate of interested compared to fixed rate savings accounts.

It’s important to be aware of the terms and conditions of any savings account you open. With many savings accounts you need to stick to these to make the most of any interest, or other benefits. 

What next?

There are loads of reasons you may want to start saving and opening a savings account, whether it’s fixed or variable rate, can help you achieve your goals. 

This article provides general information and does not take into account the financial situation of the reader. For this reason, it must not be relied on as financial advice. All accounts are subject to terms and conditions.

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