What are savings account interest rates?
Savings account interest rates show how much interest you can earn on your money, usually shown as a percentage of your balance.
Most savings accounts display interest rates as AER (Annual Equivalent Rate). This shows how much interest you could earn over a year, factoring how regularly interest is paid, and how it is compounded.
When comparing savings accounts, the AER helps you with a like-for-like comparison between different providers and account types.
Fixed vs variable interest rates
When choosing a savings account, one useful thing to think about is the interest rate and whether a fixed or variable interest rate would suit you best.
A fixed interest rate stays the same for a set period, so you know what rate you’ll get from the start. A variable rate can change over time depending on market conditions.
Other factors, like your account-specific terms and conditions can guide your interest rate. It can also be good to know the difference between fixed interest rates and variable interest rates. This could help you make better decisions about where to save.
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What is a fixed interest rate?
A fixed interest rate stays the same for an agreed term, regardless of changes in the wider market or Bank of England base rate.
This means you’ll know in advance the set interest rate for the term of your savings making it easier for you to calculate interest or repayments over time.
Fixed rate savings accounts are often used by people who want certainty and do not need regular access to their money. -
What is a variable interest rate?
A variable interest rate can go up or down over time. Unlike a fixed rate, which stays the same, a variable rate rises and falls as it’s influenced by wider economic conditions, including changes to the Bank of England base rate.
If interest rates rise, the rate on a variable savings account may increase. If rates fall, your savings rate may reduce.
Variable rate savings accounts can offer flexibility, but your returns are not guaranteed.
Key differences between fixed and variable rates
Fixed and variable savings rates work in different ways depending on the type of account you choose and each bank or building society will offer different interest rates. Interest is usually calculated daily and paid monthly, quarterly or annually depending on the account.
Fixed rates = certainty over returns
A fixed rate savings account, such as a Fixed Rate Cash ISA (Individual Savings Account) or Fixed Rate Bond, offers you a guaranteed interest rate for the full term of the account. This rate will not change and fluctuations by the Bank of England will not affect this.
Variable rates = flexibility, but less predictability
A variable rate savings account, such as an Easy Access savings account, will have interest rates that may increase or decrease over time, changing the amount of interest you can earn.
How does the Bank of England base rate affect my savings?
The Bank of England base rate influences the interest rates offered by banks and building societies.
If the base rate increases, savings rates may rise. If it decreases, savings rates may fall.
Fixed rate savings accounts are not affected once your rate is set, while variable rate accounts may change in line with market conditions.
Pros and cons of fixed rate savings accounts
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| Advantages | Disadvantages |
|---|---|
| Guaranteed interest rate for the full term | Your money is locked away for a set period |
| You know exactly how much your interest rate will be for the term | Early access to your money may not be allowed or may incur a charge |
| Rates are not affected by market changes | You cannot benefit if market rates rise |
| Good for encouraging longer-term saving | You usually cannot add additional funds after opening |
Pros and cons of variable rate savings accounts
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| Advantages | Disadvantages |
|---|---|
| Flexible access to your money, depending on account type | Interest rate can go up or down |
| You may benefit if interest rates rise | Returns are not guaranteed |
| You can usually add money whenever you like | Harder to predict future savings growth |
| A wide range of accounts are often available | Rates may fall if the Bank of England base rate changes |
FAQs
Answers to your most commonly asked questions.
Simple interest is calculated only on your original savings amount.
Compound interest is calculated on your original savings plus any interest already earned, which can help your money grow faster over time.
Compound interest is when you earn interest on both your original savings and the interest already added to your account.
For example, if you save £1,000, you earn interest in the first year. In the second year, you earn interest on both your original £1,000 and the interest added in year one. Over time, this can help your savings grow faster compared to simple interest.
Yes, but this usually involves opening a new fixed rate account and transferring funds, subject to the terms of your existing account.
A good way to compare savings accounts is to look at the AER (Annual Equivalent Rate). This shows the true yearly return, including how often interest is paid and compounded.
Interest is usually calculated daily based on your account balance and paid monthly, quarterly or annually depending on the account terms.
Savings rates change based on wider economic conditions, including the Bank of England base rate, inflation and market competition between providers.
Fixed rate savings accounts are designed for fixed terms, so early withdrawals may not be allowed or may incur an early access charge depending on the account terms.
Yes. Variable interest rates can go up or down depending on changes in market conditions, including movements in the Bank of England base rate.
It depends on your goals. Fixed rates offer certainty over returns, while variable rates offer flexibility and the potential for rates to increase or decrease over time.
