Monthly vs Maturity Interest

AndyRen_2

Haven't seen a relevant thread, so thought I'd post here - apologies if it's the wrong place. And please excuse my ignorance, I've only been used to saving in Mini Cash ISAs up til now.

I want to open a Fixed Term Bond with Birmingham Midshires. They have two alternative accounts: the Maturity Interest paying 6.97% AER (6.85% Gross PA, 5.48% Net); and the Monthly Interest paying 6.97% AER (6.76% Gross PA, 5.41% Net).

Which of the two pays the most interest overall, the monthly one (because that interest gets compounded), or are they both exactly the same (because they both have the same AER and that's the whole point of an AER)?

If they're exactly the same, why does anyone bother opening maturity interest accounts?

kostigovs

They are not exactly the same in terms of paying interest. If you take monthly interest-and you should ask yourself why you would want to do so-then it is likely to be paid into your nominated bank a/c-not the a/c that you have just opened.

Leaving interest until maturity will pay you just a wee bit more. Look at the net interest figures you quoted in your OP and work out the difference based on your intended deposit

kostigovs

oops sorry about spelling

AndyRen_2

Thanks kost. (By the way you didn't misspell anything in your reply!)

kostigovs wrote: »

Leaving interest until maturity will pay you just a wee bit more. Look at the net interest figures you quoted in your OP and work out the difference based on your intended deposit

In actual fact, BM offers the option of paying the interest back into the bond a/c, but even so, as you say, that still means the monthly interest option pays 11p less on the basis of £2000 invested, according to my hastily constructed spreadsheet! (Interestingly enough, the monthly option pays 5p more if I use the gross rates in both cases. Sadly though, that doesn't apply to me.)

What then is the point of an AER, if two accounts with the same AER pay differing amounts? Or am I missing something and it's just a matter of rounding errors?

Lokolo

If the AER is the same you get the same amount of interest. If its gross. i.e. no tax.

If you have it paid monthly rather than on maturity you pay more tax though, but in small figures its pennies.