Escalator bonds on the up
In the last fortnight the market for escalator bonds has doubled, new research shows, but what are they and what benefits do they offer?
Escalator bonds are an investment product where people place money in a product for a set period. The interest paid on these savings starts low, but then increases over the course of the investment.
This is in contrast to standard fixed-rate savings bonds, which offer a fixed rate of interest for a set period - typically between one and three years.
But while standard fixed-rate savings bonds have seen increased interest, it is the escalator market that has really taken off.
"Increased choice for consumers is welcome, but consumers should choose their product carefully, taking the time to evaluate the total possible returns," said Rachel Thrussell, head of savings at independent comparison service moneyfacts.co.uk.
"As escalator bonds are less transparent and therefore more tricky to compare, consumers should not be automatically attracted to the highest rate, usually only payable during the final year of the bond, but should look at the deal as a whole."
And this can be a danger - with the top rate paid sometimes eye-catchingly high.
"On occasions the highest rates on these products are headline-grabbing, well above what you could expect to find within other fixed-rate markets. However, consumers must take into account the lower rates paid in the initial years," Ms Thrussell added.
"Consumers should take care not to be enticed by the top rates of these bonds, as often better returns can be found by accepting a slightly lower rate for the whole term of the deal.
"And frequently, even the highest rate on offer doesn't match what could be achieved throughout the whole deal on a standard fixed-rate bond."
Comments
Newsletter sign up