The pros and cons of Premium Bonds - Sarah Coles

So anyone whose fixed rate mortgage deal is expiring this year, will feel particularly unlucky that they’re forced to make a decision about whether to fix again while rates are so high.

In reality, most of our financial decisions come down to a combination of both judgment and luck. Some of them, by contrast, are completely based on luck – including the nation’s favourite savings product: Premium Bonds. Instead of paying interest, your bond numbers are entered into a prize draw each month, and you could win a life-changing sum of money.

Even if you don’t win anything today, you get to keep your stake, and enter it again next month.

Impressively, the February draw saw the 500th £1m prize paid out. And while the jackpot has lost an awful lot of spending power since its arrival in 1994, it’s still the kind of a win that would transform your finances.

This is always a massive attraction of the bonds, but even more so when times are so incredibly tough.

The chances of winning £1m are vanishingly small, at almost 60 billion to one. However, there are hundreds of other life-changing sums on offer each month that you could get your hands on.

When the prize rate on Premium Bonds was hiked from 2.2 per cent to three per cent in January, the odds of winning a prize of any kind remained at 24,000 to one, because NS&I focused on tripling the number of these bigger prizes.

In the February draw there were 59 prizes of £100,000, and 117 of £50,000. It was a clever move, which will appeal to millions of people who are on the hunt for a financial game-changer right now.

This isn’t the only improvement to the bonds recently. This month the prize rate rose again – to 3.15 per cent.

The odds of winning a prize remained the same, and instead the focus was on boosting prizes again. This time it was primarily the smaller ones.

The number of £25 prizes actually fell by around nine per cent, while the number of £50 and £100 prizes were up just over 10 per cent to 1.28 million.

This was a canny response to inflation. With rapid price rises on all sides, £25 is unlikely to feel quite as rewarding as it did a year ago.

By adding so many more £50 and £100 prizes it means more people are winning sums that feel like they will make a difference.

These changes, and the fact that money is so tight, may well make Premium Bonds a tempting prospect.

However, if you hold the bonds, or are considering them, it’s important to be aware of the difference between the prize rate and your odds of winning.

Despite the average prize rate rising to 3.15 per cent, there are absolutely no guarantees you’ll earn this rate, and someone with average luck is unlikely to see anything like this return.

In an average month, the average saver with average luck will win nothing. It means that if you hold significant sums for a long period, you will see a serious dent in the spending power of your money.

This was always the price you paid to hold the bonds, but at a time of high inflation, it’s a bigger price, because inflation will erode the value of your stake faster.

You’re also giving up the opportunity to put the cash into the most competitive easy access savings account – which at the moment is paying over 2.9 per cent.

It’s a higher price to pay than when easy access accounts were struggling to break above one per cent.

There are millions of people who understand the trade-off perfectly, and are quite happy with it.

There are plenty of others who prefer to use premium bonds for specific things – like keeping money in that they plan to use to pay a tax bill next January.

Some use it for cash they'll need for planned expenses over the next few years – like a new car, and others will keep their emergency fund in there because the bonds offer easy access to your money.

Saving reasonable sums in the bonds, for relatively short periods, could give you the outside chance of a win – without the risk of leaving your cash in there so long that the buying power evaporates.

Of course, not everyone is a winner. A study in 2021 found that since records began 14 years earlier, three quarters of bond holders hadn’t won anything at all.

However, around the same time, someone won £1m in only their second month of holding the bonds – the 21st time that had happened.

So even when you’ve carefully weighed up whether you’re happy to bear the brunt of inflation for the chance of a win, you still have to ask yourself the question of whether you feel lucky.

House prices fall again

The Nationwide House Price Index, out this week, showed average prices fell again between December and January – and annual price growth slowed to a glacial 1.1 per cent.

Prices are now down 3.2 per cent from the peak last August. Unfortunately, the picture looks set to get even tougher.

The previous day, the Bank of England revealed that mortgage approvals for purchases fell again in December – to their lowest level since the market was effectively shut in May 2020. It means there’s no immediate hope of a recovery in prices.

Looking ahead, it’s hard to see anything changing for the better any time soon. Budgets are still squeezed, putting a brake on people trying to save a deposit, and possibly forcing some people to eat into their savings.

After years of low rates we’ve also seen mortgage rates surge in recent months taking huge chunks out of people’s spare cash. This can be enough to put people off making the move to buy that dream property for another day while those currently on tracker and SVR products have seen their payments soar.

Even those on fixed rate deals will be eyeing the market with caution as those coming to the end of their deals in the coming months will find themselves operating within a more expensive market.

There is slightly better news for Yorkshire and the Humber than elsewhere in the country, because on a typical wage in the region, someone setting aside 15 per cent of their take-home pay each month, and aiming for a 20 per cent deposit, would get there in slightly less than seven years.

That’s less than half the time it would take the average Londoner to do the same. However, even those who have a deposit ready to go may well be tempted to wait and see.

Squeezed incomes, higher mortgages, the threat of a recession, and forecasts of house price falls may well encourage would-be buyers to hold off until the outlook looks a bit clearer.