CHAPS - when it's worth it

Dagobert

When having to transfer big amounts CHAPS payments spring to mind. Before splashing out £30 or more though, calculate whether it gains anything. I bet you will be surprised just how big the amount needs to be for a CHAPS payement to pay off!

BACS Transfers and cheque payments cost several days of lost interest. CHAPS payments are immediate but might still lose a day.


To compare the payment methods, you need to determine the following parameters:

• Does the receiving bank pay interest on the day of receipt?
• Does the transferring bank pay interest on the day of withdrawal?
• When does the receiving bank start paying interest on cheques?
• How many days does a BACS transfer between these two banks take?
• Does a CHAPS payment between these two banks really lose no days?
• What's your tax bracket?

How does your tax rate come into it? While the interest is taxed, either at the basic or higher rate or maybe not at all, the CHAPS fee cannot be deducted as an expense* and therefore comes off your taxed income.

To calculate the break-even point, you just need to plug the above information into the following formula:


Formula

be = (cf * 365 * 100 * 100) / ((p * d * (100 - tb))

where

be break-even point: the amount from which a CHAPS payment is worth it
cf cost of CHAPS transfer
p interest rate of target bank account
tb tax bracket (currently: no tax = 0, basic rate = 20, higher rate 40)
d number of days saved through CHAPS payment


Examples

cf = £30 CHAPS fee
p = 5.15% interest rate
tb = 20% basic rate tax payer
d = 3 days gained

be = (£30 * 365 * 100 * 100) / ((5.15 * 3 * (100 - 20)) = £88,592

as above except:

tb = 40% higher rate tax payer

be = (£30 * 365 * 100 * 100) / ((5.15 * 3 * (100 - 40)) = £118,122

and if it only saves 2 days:

d = 2 days gained

be = (£30 * 365 * 100 * 100) / ((5.15 * 2 * (100 - 40)) = £177,184


We are talking megabucks before you even need to think about CHAPS!



Terminology: When banks state that a payment, for instance, takes 3 working days, the day the money is transferred is included in this figure. In other words: a payment sent on Monday will arrive on Wednesday. In the
BACS Transfers thread I refer to this as a 2-day transfer meaning the money will arrive in days' time.

* unless the funds belong to a company

Stonk

Dagobert wrote:

We are talking megabucks before you even need to think about CHAPS!

Hmmm. But surely that's only kilobucks ...

(even with the current low value of the US buck!)

Searcher2

I am about to move a large amount of money so was interested in your thread. However, looking at the Nationwide site

Charges CHAPS £20
Funds to clear same day as we release the payment

I think this is good news for Nationwide customers looking to move large amounts to better paying accounts. I haven't worked out what the break even amount is based on this information but I know I will be better off using CHAPS. I used this method before moving money to ING and it definitely appeared in ING the same day. The problem is that with saving accounts such as ING you can't do a CHAPS transfer out of them.

DocProc

Can someone tell me what they regard as the 'cut-off time' to effect a 'same day' transfer of cleared funds using a CHAPS Transfer?

Is the cut-off time the same for each bank or do main branches have any advantages over smaller branches?

I ask because I really thought it was 3:00pm. When I asked at my local bank they told me it is 2:30pm so as to give them time to get it in (processed) on time.

Are all banks the same?

I understand some transactions have to be done by 11am and others by 1pm. What are these exactly?

Has anyone got any good explanatory links, which give information on these 'cut-off times?

codetown

Check it with your bank.
With Nationwide the CHAPS cut-off time is 13.00 on any working day.

Dagobert

Cut-off times for BACS and CHAPS vary for every bank.

Kilty_2

Would anyone appreciate a web based calculator that uses the above formula to work out if you'd break even using CHAPS or not?

Could knock that up if it's wanted.

ashm1

Hi,

Where I worked previously we always used CHAPS for property completions.

Kind regards,

Ashley.

ED

Kilty offered, "Would anyone appreciate a web based calculator that uses the above formula to work out if you'd break even using CHAPS or not?"

Yes please, Kilty, and thanks to Dagobert for the OP.

Kilty_2

Give me a day or so, might even be done tonight. I'll host it on my webspace since I have plenty of bandwidth that I don't use.

Kilty_2

Okay, it'll be based on the following interpretation of that algorithm:

gain/loss = (amount * (interest rate * 1 - tax) / 365) * days lost) - CHAPS fee

Interest rates and tax bands will be converted to fractions on the fly so the user will just need to input as they would normally, ie 5.15% and the code would make that become 0.0515 itself.