Monthly or Annual Interest?

vaderag

This may seem like a novice question, but is there any benefit/cost to choosing either to get your interest paid Monthly or Annually?

Thanks

Lokolo

If the AER is the same (annual equvalent) no.

Example:

Barclays: 6.08% Monthly Interest. AER 6.25%
HSBC 6.25% Annual Interest. AER 6.25%

No difference apart from Barclays account will give you monthly interest which you may end up withdrawing, making the AER less. Basically the AER assumes you keep the interest in the account.

vaderag

Thanks very much - makes sense now!

jdavtz

It can make a slight difference if your interest is taxed, as if it's paid monthly they'll take 20% off the interest payment, so further compounding will be on a slightly reduced amount.

E.g. say you invest £1000 and earn £10 interest in a month, if you are paid interest after 12 months then in the second month you'll be earning interest on £1010, but if you're paid interest monthly you'll be earning interest on £1008 in the second month.

Unless I've misunderstood and the equivalent AERs cancel this out.

Lokolo

^^ that is correct. but the difference is so neglible unless you have a lot of savings (getting into 6 figures) from what I can remember.

I think Milarky has a spreadsheet on this.

exel1966

vaderag wrote: »

This may seem like a novice question, but is there any benefit/cost to choosing either to get your interest paid Monthly or Annually?

Thanks

Monetary benefits of annual over monthly, No not really bar a few pennies.

However, with monthly payments it's nice to watch the balance amount accruing and it's also easier to notice problems with the correct amount of interest if they arise (which they can) as you don't have to wait the 12 months to notice/sort the problem.

Remember though you will only get the same AER as annual if you leave ALL of the monthly interest paid in the account for the full year.

Jon_01

I've been looking at monthly acc's this morning (or trying to).
Someone's suggested it might be an idea to sell the house (which we were planing to do any way), stick the funds (of about 160,000 to 180,000) into a monthly income acc and rent a flat for 6 months, using the monthly income to pay the rent and see where the house market goes ?
Anyone think that's viable ??

isofa

Jon_01 wrote: »

I've been looking at monthly acc's this morning (or trying to).
Someone's suggested it might be an idea to sell the house (which we were planing to do any way), stick the funds (of about 160,000 to 180,000) into a monthly income acc and rent a flat for 6 months, using the monthly income to pay the rent and see where the house market goes ?
Anyone think that's viable ??

On the top paying accounts e.g. 6.55% Kaupthing Edge, if you had it paid monthly on 160K, you'd be getting roughly £700 per month after tax, (give or take) so your rent would have to be lower than this, and remember if you are spending the interest, the capital is becoming worth less over time due to inflation, which is rampant at the moment. But if the housing market it still falling, you could be onto a winner, if you can rent something that cheap!

Jon_01

isofa wrote: »

On the top paying accounts e.g. 6.55% Kaupthing Edge, if you had it paid monthly on 160K, you'd be getting roughly £700 per month after tax, (give or take) so your rent would have to be lower than this, and remember if you are spending the interest, the capital is becoming worth less over time due to inflation, which is rampant at the moment. But if the housing market it still falling, you could be onto a winner, if you can rent something that cheap!

Thats the kind of figures I was getting.

My daughter and her boyfriend have just moved into a brand new 2 bad flat for £650 a month and there are some still free in the development, so the sums add up. I appreciate what your saying about the capital reducing due to inflation, but if the pundits are right about the housing market falling 20% to 25% in the next 12 to 18 months it'll more than cover that (IF it falls !)

Darth_Calculus

Its a good idea in principle, but the difficulty is selling your house, though that is a debate for another board!

I think CPI/RPI is irrelevent, as the ONLY inflation measure that is important is the inflation rate on what you are going to spend the money on, namely House Price Inflation.

Going back to the original poster's question, does anyone know how the FSCS works on accrued interest? For example, you put £10k in an annual paying account, and 11 months down the line the bank goes bust, would you only get your £10k, or would you also get the accrued interest? Contrast this with monthly interest, you'd have 11 months interest as part of the account balance at the time that the bank went bust, which presumably you'd get back through the FSCS. Yes its unlikely, but more than anything, I am quite interested to know the answer! :rolleyes:


DC

JimmyTheWig

Not all accounts have the option of monthly interest.
Not all accounts that offer monthly interest give the same AER for monthly and annual.

So from that respect you tend to get more interest from an annual account. But you gain the flexibility of the monthly interest.
Though obviously you could still do your plan with an annual interest account, as long as you have unrestricted access to the funds. Work out how much interest you will get over the year and take 1/12 of that out each month.