Annual vs Monthly interest-Northern Rock monthly much lower than others

savetilibleed

We all know Monthly interest (when there is that option) is always a bit lower than annual, but Northern Rock pays consistantly much less for monthly compared to other banks/building societies.

Example
Northern Rock Fixed Rate Bond at 3.70% AER/Gross when paid annually is only 3.45% AER and 3.40% monthly.

can't find an A-B comparison now, but...

Chelsea BS 3.80% AER/Gross annual is 3.74% gross when paid monthly. This is only 0.06% less compared with Northern Rock's 0.3% less.

For Northern Rock on £10,000 that amounts to £30 in a year. For Chelsea's account the difference is only £6.

WHY

RayWolfe

Because they can. The AER is the rate to use, most providers give the same APR for both payment options which means a lower rate for monthly payments.

LemonTree_3

savetilibleed wrote: »

Northern Rock Fixed Rate Bond at 3.70% AER/Gross when paid annually is only 3.45% AER and 3.40% monthly.

I don't get it. First you are saying the AER is 3.70% and then it's 3.45% AER.
Which one do you mean?

savetilibleed

LemonTree wrote: »

I don't get it. First you are saying the AER is 3.70% and then it's 3.45% AER.
Which one do you mean?

To clarify have a look directly at the page on their website that quotes the interest rates when paid annually and compare the monthly option HERE

Then compare Chelsea BS 1 year bond HERE

psychic_teabag

LemonTree wrote: »

I don't get it. First you are saying the AER is 3.70% and then it's 3.45% AER.
Which one do you mean?

Seemed clear to me :
when interest paid annually, you get 3.70% annually => AER is 3.70%
when interest paid monthly, you get 3.40% annually => AER is 3.45%

I had been pondering recently (in response to another thread about annual/monthly interest)...

If the tax becomes due when the interest is actually credited to the account, then with monthly interest, the bank *might* have to pay out a bit of tax to the govt monthly, but with annual interest, the bank doesn't have to pay it until the end of the year, so it can hang onto it, and hence earn money on it. But this is pure speculation about how things might work. (Easier and more interesting than actually researching it !)

Lokolo

psychic_teabag wrote: »

If the tax becomes due when the interest is actually credited to the account, then with monthly interest, the bank *might* have to pay out a bit of tax to the govt monthly, but with annual interest, the bank doesn't have to pay it until the end of the year, so it can hang onto it, and hence earn money on it. But this is pure speculation about how things might work. (Easier and more interesting than actually researching it !)

That is correct and has been discussed on this board before, but like ages ago. Someone did the calculations and it really only effects larger amounts. Smaller amounts you may end up paying 1p more tax going monthly.

withnell

Surely the reason is quite clear - the bank does not have to pay you anything until the end of the term, so does not have to have that as an outgoing cashflow each month. Similar to the reason they'll pay you a higher rate for a longer term investment - its both more stable for them funding-wise and means they don't have to find the interest cash for a longer period

savetilibleed

withnell wrote: »

Surely the reason is quite clear - the bank does not have to pay you anything until the end of the term, so does not have to have that as an outgoing cashflow each month. Similar to the reason they'll pay you a higher rate for a longer term investment - its both more stable for them funding-wise and means they don't have to find the interest cash for a longer period

That may be the case, but it only seems to be Northern Rock (as far as I can see) that have this larger difference between the annual and monthly rates.

Another comparison example - two year bonds.
Northern Rock 4.15% gross for annual, 3.85% gross for monthly. On £10,000 this makes a difference of £30/year. For receipt of net interest at 3.32% and 3.08% resp. the difference is £24/year.

For Barnsley bond 4.00% annual is 3.93% monthly equating to only £7/year difference on £10,000. For net at 3.14% and 3.2% resp. this is £5.60/year.

So the higher AER/gross of 4.15% for NR when paid monthly at 3.08% net is less than Barnsley's 4% AER/gross when paid monthly at 3.2% net.

Something is wrong, even if it is to do with cashflow, but it means customers wanting a monthly income have a much poorer deal from Northern Rock compared to just about everywhere else.

psychic_teabag

If you need monthly income, you can use the trick at http://www.moneysavingexpert.com/savings/savings-accounts-best-interest#calc to have your cake and eat it. I reckon this works out better than taking the monthly interest version.

BritRael

I always thought that annual interest would be better than monthly. However, Halifax have a 2 year bond at 4.15% annual and 4.23% monthly and a 3 year at 4.5% & 4.59% respectively.

Any thoughts why this would be?

savetilibleed

BritRael wrote: »

I always thought that annual interest would be better than monthly. However, Halifax have a 2 year bond at 4.15% annual and 4.23% monthly and a 3 year at 4.5% & 4.59% respectively.

Any thoughts why this would be?

They seem to have increased the AER for monthly interest in order to make the gross the same whether it is taken annually or monthly, ie at 4.15% gross. Bucks the trend though. Actually Saga do that with their Top 5 Tracker at 2.04% AER/Gross annual and 2.06% AER/2.04% gross monthly.