Halifax Reward "AER" calculation

Stephen_Leak

I have one of these accounts.

In the article on the main site, it says that, if your average balance is £500, the equivalent "AER" is 15% and that if your average balance is £1500, the equivalent "AER" is 5%.

How is this worked out? What I am looking for is a formula, which I can use in Excel to take my current average balance (this is the easy bit, using the =AVERAGE function) and give me my current equivalent AER.

I know. Humour me. I'm part Scottish.

jambosans

I'm not sure what account you are referring to?

If you mean the Halifax Reward Current Account, this has no AER, as the £5 Reward is not calculated as a percentage of the in-credit balance.

AER isn't the easiest thing to get your head around, and perhaps someone over in Savings & Investments can explain more clearly. Effectively (from what I understand), AER is your interest rate taking into account compound interest (the interest you earn on interest paid).

Good old Wiki explains (although it's not light reading, there's formula for working out your AER):-
http://en.wikipedia.org/wiki/Annual_equivalent_rate

Edit: if you wanted to pretend the Reward was AER, you could work it out compounded over 12 months (for example), and assuming interest is paid monthly you do the following:-
Reward: £5/ Average monthly balance: £500 = 0.01 or 1% x 12 months = 12% annual interest rate.
Then, following the formula on Wiki:
(1 + 0.12/12)^12 - 1 = 12.68% AER (rounded)

Where this becomes a headache is when your monthly average differs, as the £5 when calculated as a percentage of your monthly balance will be different. You could work out your interest rate monthly, add all the rates up, calculate the annual average rate and apply this to the formula but this defeats the purpose of AER which gives a projected rate, whereas using averages would give a retrospective rate. Seems a much of a muchness, much like my reply.

I think the above highlights nicely why the £5 Reward should not be considered AER.

partlydave

Or, as I keep a balance of £0, that saves any calculations of AER or anything else. I wouldnt keep any balance in that account. Find another current account that pays interest and transfer to and from the 2

rb10

In your spreadsheet, do you have a separate line for each day, or just when the balance changes.

As a simple example, if you had:
1st May ... £100
30th May ... £10000
... then =AVERAGE would make that £5050, when that is clearly not the average balance over the month.

You'd need to have...
1st May ... £100
2nd May ... £100
3rd May ... £100
and so on until
29th May ... £100
30th May ... £10000
... to be able to use =AVERAGE.

Biggles

Stephen_Leak wrote: »

In the article on the main site, it says that, if your average balance is £500, the equivalent "AER" is 15%

On that basis, my AER is 7,500%. If only I had more accounts like that!