Aldermore & other fixed rate bond accounts

IWantToUnderstand

Hi,

I have £10,000 pounds to invest & I'm very interested in these fixed rate bonds with monthly income on offer from the likes of Aldermore, Julian Hodge etc. I've read their websites & seen the rates. I've even spoken to them on the phone. The thing is they've said they're unable to confirm exactly the rate I'd get a month because they calculate per day & months have different amount of days. Aldermore gave me a calculation formula though which is the gross rate x 80%.

So my sums are thus:

Aldermore 5 Year Fixed Rate Bond
5.27% of £10,000 x 80% = £421.60

Can anyone confirm this is correct? I did this the other way round ie gross interest minus 20% as tax & the figure is the same. Is this what you get every month? If so you would receive £25,296 over 60 months plus principal! Fantastic rate but it seems unrealistic & raises a flag of scepticism for me.

If I'm being an idiot & getting the sums completely wrong please let me know.

Thanks!

financial_illiterate

Is that not more likely to be what you'd get each year, if you're a basic rate tax payer? So the monthly income is more like £35?

If you're a higher rate tax payer, you'd get £316.20 per year, roughly £26 a month?

IWantToUnderstand

Thanks for replying. They've been quite clear that that is the monthly gross, payable monthly to a nominated UK bank account.

From Aldermore's website:
Term, Gross (Annual Interest), Gross (Monthly Interest), AER*
1 Year 3.49 3.44 3.49
2 Year 4.21 4.13 4.21
3 Year 4.80 4.70 4.80
4 Year 5.15 5.03 5.15
5 Year 5.40 5.27 5.40
What I'm trying to work out is are my sums way off, and/or is there another way to get an approximate figure for the life of the bond.

jem16

IWantToUnderstand wrote: »

Thanks for replying. They've been quite clear that that is the monthly gross, payable monthly to a nominated UK bank account.

I think you have misunderstood what you were told.

5.27% is the monthly interest rate. However this is not what you would get each month.

As financial illiterate calculated if you went for monthly interest and had it paid out to you you would receive £527 gross interest in one year. After basic rate tax this would be £421.60 so approximately £35 per month.

If you chose to keep the monthy interest in the account the interest rate would be 5.4% as the interest added on each month is compunded.

So Aldermore were correct in stating that it would be 5.27% for monthly interest but this is the rate for the whole year.

What I'm trying to work out is are my sums way off

Yes they are. For your calculations to be correct would mean an interest rate of around 63.24% - do you think that sounds correct?

IWantToUnderstand

Yes I'd arrived at the 63% figure a couple of days ago, hence my scepticism about the deal. I would say that I should have been sceptical about my ability to add up but the language used to describe these offers leads to misunderstanding, deliberately in my view. If not, why the refusal to help people work out the rates? Doubtless many have signed up for these types of accounts only to receive a rude awakening, especially when you can't get the money back before term.

So I would say my sums are not way off, but the language used to describe these deals is. But I would say that, wouldn't I?

Why they couldn't have explained it as simply as you did or just simplify the language is beyond me.

Thanks again.

jem16

IWantToUnderstand wrote: »

Yes I'd arrived at the 63% figure a couple of days ago, hence my scepticism about the deal. I would say that I should have been sceptical about my ability to add up but the language used to describe these offers leads to misunderstanding, deliberately in my view.

I don't think they are deliberately trying to deceive. All interest rates are quoted for annual interest.

AER stands for equivalent annual rate which is why you have the terms Gross (annual interest), Gross (Monthly interest) and AER. The AER is there to help you understand and compare the different rates of interest. This is how the banks must advertise their rates.

IWantToUnderstand

jem16 wrote: »

I don't think they are deliberately trying to deceive. All interest rates are quoted for annual interest.

AER stands for equivalent annual rate which is why you have the terms Gross (annual interest), Gross (Monthly interest) and AER. The AER is there to help you understand and compare the different rates of interest. This is how the banks must advertise their rates.

Yes. Perhaps if it said 'yearly gross if you want interest paid monthly' it would be clearer. At least to my mind. I've never been able to make head nor tail of AER & no bank or building society has ever helped relieve me of my ignorance, only confused me more.

You should give financial advice for a living. I've got more sense out of you in five minutes than in 25 years of dealing with banks.

Lady_K

Can you have the interest paid into the actual aldermore fixed rate account then rather than having it put into a different one? I know the barnsley building society one wouldnt allow this but I'd prefer mine to go into the fixed account so it will be saved for the 5 years too, most of them seem to only allow interest into a different account

Hungerdunger

Lady_K wrote: »

Can you have the interest paid into the actual aldermore fixed rate account then rather than having it put into a different one?

A quick look at the Ts and Cs reveals that interest can be....

Paid to your account, another Aldermore easy access or notice account; to a UK bank or building society account in your name(s)

Lady_K wrote: »

I know the barnsley building society one wouldnt allow this

A quick look at their Ts and Cs reveals that...

Annual interest is payable annually and at the end of the term and may be added to the account or transferred to another account.
Monthly interest is payable on the last day of the month and must be transferred to another account.