ISA Promotional Rates: Are they Even Any Good, Really?
If you’ve been shopping around for an Individual Savings Account (ISA), you’ve probably seen some banks and building societies offering ISA promotional rates. These offers often look incredibly appealing, featuring high-interest rates that seem like a great deal.
But what happens after the promotional period ends? And more importantly, what does it mean for your savings if the Bank of England (BoE) drops interest rates while you’re locked into an ISA? Let’s break it all down.
What is an ISA Promotional Rate?
An ISA promotional rate is a special interest rate offered by a bank or building society to attract new customers. These rates typically last for a fixed period, often 6 months to 12 months, before reverting to a standard rate, which is usually much lower.
The purpose? Banks use promotional rates as a marketing tool to get new customers through the door, hoping that once you’ve deposited your money, you’ll stay even after the rate drops. While these promotions can be beneficial in the short term, it’s what happens next that really matters.So what happens once they expire?
When the promotional period is over, your ISA reverts to the provider’s standard interest rate. This is where many savers lose out, as these rates can be significantly lower than the initial offer.
Example: How Promotional Rates Can Affect Your Savings
- You open an ISA with a 5% promotional rate for 12 months.
- You deposit £10,000, expecting strong returns.
- In the first year, you earn £500 in interest.
- After the promotional period ends, the rate drops to 1%.
- In year two, your savings only grow by £105 instead of another £500.
What does the BOE have to do with it?
The BoE sets the base rate, which influences the interest rates banks offer on savings and lending products. Here’s where things get interesting:
Example: The Risk of a BoE Rate Drop
Imagine you sign up for a 5% promotional rate for 12 months. If, after that period, the BoE drops rates from 5% to 2%, your ISA provider could drop your standard rate from 1.5% to 0.5%. Now, instead of earning £500 in the first year and at least £150 in the second, you’re left earning a mere £50. This is why savers should always look beyond the headline rate and understand what happens when the promotional rate ends.Do banks even make money from this?
Banks aren’t offering these high rates out of generosity—they have a strategy behind it. Here’s how they make money from promotional ISAs:
- Short-Term Attraction: They offer a high rate to pull in customers.
- Long-Term Profit: Once the promotional period ends, many customers don’t move their money, meaning the bank now pays them significantly lower interest while using their savings to fund loans and investments at higher rates.
- Market Adjustments: If the BoE rate falls, banks adjust their savings rates even lower, widening their profit margins.
How to Avoid Falling into the Bank’s Trap
- Check the standard rate before opening an ISA.
- Set a reminder for when the promotional period ends.
- Be ready to switch if the rate drops too much.
- Compare ISAs regularly to ensure you’re always getting the best deal.
Are promotional ISA rates ever a good deal?
Yes! If you plan ahead, a promotional ISA can work in your favor. Here’s when they make sense:
✅ If you’re saving short-term: If you only plan to keep money in an ISA for a year or so, a high promotional rate can maximize your returns.
✅ If you’re disciplined about switching: If you stay on top of your finances, you can jump from one high-rate ISA to another, ensuring you always get the best deal.
✅ If you use an ISA laddering strategy: This involves spreading your money across multiple ISAs with different maturity dates, allowing you to reinvest in higher rates when opportunities arise.
However, if you’re someone who forgets to check their account, a promotional rate could mean you end up earning very little in the long run.
Is there a difference between fixed and variable on promotional rates?
Yep, promotional ISAs can come in fixed or variable interest rate structures. Here’s how they compare:
Fixed Promotional Rates
- Interest rate stays the same during the promotional period.
- You know exactly how much you’ll earn.
- Once the term ends, the rate drops to a standard lower rate.
Variable Promotional Rates
- The rate can change during the promotional period.
- Often tracks the BoE rate but stays lower by 0.5% to 1%.
- After the promo period, the rate reverts to an even lower standard rate.
In a high-interest environment, a fixed promotional rate is safer because it locks in your returns.
But if rates are expected to rise, a variable rate might pay off better (though it comes with uncertainty).
How do I make the most of this?
Here are a few simple rules for making the most from your promotional ISA rates:
- Know When the Promo Period Ends – Don’t get caught off guard.
- Use an ISA Interest Calculator – This can help you compare returns before signing up.
- Consider a Mix of Fixed and Variable ISAs – This hedges against rate fluctuations.
- Be Ready to Transfer – If your provider slashes your rate, be prepared to move your money.
Final Thoughts
A promotional rate ISA can be an excellent tool for maximizing short-term gains, but you need to understand what happens next. If you’re proactive and willing to switch accounts when needed, you can consistently earn competitive returns. However, if you’re looking for a long-term, hands-off savings solution, you might be better off considering a high fixed-rate ISA or a flexible, consistently competitive account.
The key takeaway? Don’t be blinded by the big, bold headline rate—always check the fine print and have a plan for when the promo period ends!
Resources on ISA promotional rates
- Variable vs Fixed Rates: How It Impacts ISA Returns - February 5, 2025
- What is an ISA Promotional Rate? - February 4, 2025
- How Compounding Affects ISA Returns - February 4, 2025