Annual Interest vs Monthly interest

YoungSaver20

I have a guaranteed reserve with the Halifax and the maturity date is 1st of May so I'm deciding for next year whether to choose the monthly interest rather than annual interest.

So far I am leading towards monthly interest because that's slightly more (even though it's only £5 or so of a difference still better).

Is there any negatives to monthly interest such as would the rate change because I assume it's a fixed rate and paid monthly rather than at the end of the year.

gopher2

What you need to look at is the AER, which is the Annual Equivalent Rate. For most accounts the AER is the same for annual or monthly interest accounts. If so, the applied rate is shown as a little lower but works out the same over 12 months because of the monthly compounding.

The AER calculation is done over a full year. So if you close an annual account in less than a year the actual AER you get will be slightly higher (though could be reduced or negated due to losing interest during the transfer).

Both types of account can have fixed or variable rates. The advantages and disadvantages depend on individual circumstances.

Geoffo_M

If you are able to reclaim tax on interest, it may not suit you to be credited with a year's interest on the 6th April, and be more beneficial to receive payments monthly. The opposite may apply - it depends entirely on your personal circumstances