AER does not (seem to) match what bank says will be in account after 1 year [Help!]
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AntiqueSquid
Posts: 4 Newbie
Apologies for the bad title, I could not think of a better way.
The bank First Direct is currently advertising 5% AER in their regular saver account. I would hope to put the maximum in each month (£300). This would lead to £3600. 5% would lead to £3780 - however, this is not what they claim you will have. According to their own figures in their "interest rate and charges" booklet, the "after one year" figure is £3697.50, which, to me, is wrong.
If someone could explain this, I would be grateful.
The bank First Direct is currently advertising 5% AER in their regular saver account. I would hope to put the maximum in each month (£300). This would lead to £3600. 5% would lead to £3780 - however, this is not what they claim you will have. According to their own figures in their "interest rate and charges" booklet, the "after one year" figure is £3697.50, which, to me, is wrong.
If someone could explain this, I would be grateful.
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Comments
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You only earn interest on what is actually in the account!
So, the first £300 will earn 5%, the second will only earn 11/12ths of 5% as it will only have been in the account for 11 months by the end of year one. And so on, with the last £300 earning just 1/12th of 5%.
The net effect is that the average balance over the year is only just over half of the closing balance, and hence the interest being just over half of what you thought.0 -
Thank you very much, I thought it must have been something simple I was overlooking. Seems dodgy to me to have such a system, but oh well!0
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I think this is right. Month, Balance, Interest for that month
- 1 Month £300.00 £1.25
- 2 Months £600.00 £2.50
- 3 Months £900.00 £3.75
- 4 Months £1,200.00 £5.00
- 5 Months £1,500.00 £6.25
- 6 Months £1,800.00 £7.50
- 7 Months £2,100.00 £8.75
- 8 Months £2,400.00 £10.00
- 9 Months £2,700.00 £11.25
- 10 Months £3,000.00 £12.50
- 11 Months £3,300.00 £13.75
- 12 Months £3,600.00 £15.00
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AntiqueSquid wrote: »Thank you very much, I thought it must have been something simple I was overlooking. Seems dodgy to me to have such a system, but oh well!
What's dodgy about only paying interest on money you have in the account? It would certainly be dodgy using the same process you seem to be suggesting by charging you interest on your mortgage when you'd paid it off!Remember the saying: if it looks too good to be true it almost certainly is.0 -
Seems dodgy to me to have such a system, but oh well!
What is dodgy about it?
Dodgy would be expecting interest on money you haven't deposited.I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.0 -
You earned 5% per annum on everything you deposited.
That's not the same as earning a 5% return on everything you deposited.I am one of the Dogs of the Index.0 -
To clarify: By dodgy, I mean I cannot find where it says "monthly interest paid", thus on the surface it can appear to be a 5% paid annually (like, for example, a bond). This is in part what led to my confusion.0
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It does say "interest calculated daily" on their website:
http://www1.firstdirect.com/1/2/savings-and-investments/savings/regular-saver-account#at-a-glance
But to be fair, to the uninitiated that statement probably doesn't mean much. You're not the first and won't be the last to make this mistake.0 -
Banks are required to advertise the AER to make it easy to compare accounts. Your money is always better off in an account paying 5% AER than one paying (say) 3% AER, even if it's only in the 5% AER one for a short period.AntiqueSquid wrote: »To clarify: By dodgy, I mean I cannot find where it says "monthly interest paid", thus on the surface it can appear to be a 5% paid annually (like, for example, a bond). This is in part what led to my confusion.
A bank might advertise a normal instant access savings account as paying 3% AER*, which shows the amount of interest you'd get if you made a single deposit then left it there for a year. Presumably nobody would assume that meant that you could deposit £1 in January then another £999 in December and get £30 interest the following January - but that's exactly the logic that makes people expect that they'll get 5% of the final balance of the regular saver account.
Now, imagine that HSBC did advertise their regular saver as paying 2.5% of the final balance. This might prevent some people being confused about how much interest to expect - but it would cause confusion in other ways as people would think that they were better off keeping their money in the normal savings account paying 3% AER than they were putting it into the regular saver paying "2.5%". This would not be correct - you will always earn more interest by moving money from the normal account to the regular saver account, even if you don't/can't move it all at once. Advertising the regular saver as paying 5% AER makes this important point clear.
In other word's: it's not dodgy; it's exactly how it's supposed to work, and having a single method of calculating the interest rate is to the customer's benefit.
*OK, in the current market you won't find many instant access accounts paying 3%, but bear with me; it's an example for illustration0 -
AntiqueSquid wrote: »To clarify: By dodgy, I mean I cannot find where it says "monthly interest paid", thus on the surface it can appear to be a 5% paid annually (like, for example, a bond). This is in part what led to my confusion.
It is here https://www1.firstdirect.com/1/2/savings-and-investments/savings
where the headline says:
5% AER/gross fixed for 12 months.
Interest calculated daily and paid on 12 month anniversary of account opening.
and here https://www1.firstdirect.com/1/2/savings-and-investments/savings/regular-saver-account
where it says
interest is calculated daily and paid 12 months after you opened the accountI am an Independent Financial Adviser. Any comments I make here are intended for information / discussion only. Nothing I post here should be construed as advice. If you are looking for individual financial advice, please contact a local Independent Financial Adviser.0
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