First Direct to launch 6.25% mini cash ISA

ED

Some of you guys clearly greatly enjoy maths challenges! Please could some of you check my rough calculations of what I believe to be a maximum advantage of less than £5 having a First Direct e-ISA for the first 6 months of the impending new tax year (6 April – 6 Oct '05) before transferring to another provider?

My calculations are on Page 8 of this thread.

I'm amongst those unable to transfer the current tax year's ISA to First Direct. So I can't use Milarky's smart idea, alas.

grumbler

ED wrote:

Some of you guys clearly greatly enjoy maths challenges! Please could some of you check my rough calculations of what I believe to be a maximum advantage of less than £5 having a First Direct e-ISA for the first 6 months of the impending new tax year (6 April – 6 Oct '05) before transferring to another provider?

Your calculations are toooooo complicated :eek: . I offer a little less accurate, but very simple:
£ 3000*(6.25%-5.4%)/2=£12.75 - extra interest in FD if compared with 5.4%. YES, 6.25% as it is ANNUAL EQUIVALENT RATE.
£ 3000*5.4%/52=£3.12 - 1-week loss of interest during transfer.
Difference is about £9.50. More than £4.54, but still not a lot. And do not forget A&L with their 5.4% will charge you for transfer, so I would not choose them at the moment.

ED

grumbler - thanks. I guess potential gain via First Direct would diminish badly if Base Rate rises, and FD fails to pass it on. Hence my desire for fairly precise calculations, on this occasion.

Sunday Times newspaper (March 27) mentions ISA transfer fees charged as follows :

Portman Bdg Soc £30
A+L's £25 (as mentioned by grumbler)
Ecology BS £25
National Counties BS 10 days interest

In the new tax yr I'll be amongst the rising number of ISA transfer novices, after withdrawal notice expires late-May for many years' ISA + TOISA currently @ 5.20% gross. This makes me extra cautious about choosing a fresh provider for 6 April - or wondering whether to wait till late-May to open new ISA, to benefit from 1st 6-month bonus offered by Lambeth Bdg Soc (5.65%)...?

isasmurf

My calculations suggest that you would actually get £3.02 LESS if you invested in First Direct for 12 months, rather than A&L. If you moved at the end of the promo period to say, A&L, you would get £13.86 MORE than investing in A&L for the full 12 months. These calculations are not quite accurate as I've calcualted interest on a monthly basis (as opposed to a daily basis as banks do) and I've not allowed for any loss of interest in the transfer process, but they give an approximate idea of the gains/losses.

Investing in A&L @ 5.4% for 12 months:
£3000*5.4%=£162 interest

Investing FD & transferring to A&L:
£3000 @6.08% for 6 months= £3000*(1+0.0608/12)^6=£92.36 (FD pay interest monthly)
£3092.36 @5.4%gross/AER for 6 months=£3092.36*0.054/12*6=£83.49
Total interest £175.86

Investing in FD for 12 months:
£3000*(1+0.0608/12)^6=£92.36
£3092.36*(1+0.0427/12)*6)=£66.61
Total interest £158.98

Grumbler, it is wrong to compare FDs AER with A&Ls AER - which actually defeats the purpose of AERs. It is IMPOSSIBLE to get 6.25% on FDs e-ISA. To get 6.25% you would need to be paid the monthly interest of 6.08% for a FULL 12 MONTHS, they only pay this FOR 6 MONTHS.

By my calculations First Direct should be advertising their e-ISA at 5.3% AER.

EDIT: I should say calculations are based on an investment date of 6th April.

ED

isasmurf - I for one wouldn't aim to invest for 12 months in First Direct's e-ISA - unless as October '05 approaches they announce a truly competitive rate rise! :-)

"By my calculations First Direct should be advertising their e-ISA at 5.3% AER."

Sounds right. I made the gross rate 5.175%. Hopefully next weekend's newspaper ad's will include accurate AER, otherwise methinks FD will be in trouble for misleading people.

Anyone here experienced using Lambeth Bdg Soc for a cash ISA? Their current 5.65% attracts me (includes bonus for 1st 6 months). I'm eager to know people's experience transferring-in previous years' ISAs + TOISA.

grumbler

isasmurf wrote:

My calculations suggest that you would actually get £3.02 LESS if you invested in First Direct for 12 months, rather than A&L.

Right. However, as far as I understand nobody here intends to keep the FD ISA for a whole year.

If you moved at the end of the promo period to say, A&L, you would get £13.86 MORE than investing in A&L for the full 12 months.

Yes. Very small difference with my approximate £12.27 result.

Grumbler, it is wrong to compare FDs AER with A&Ls AER - which actually defeats the purpose of AERs. It is IMPOSSIBLE to get 6.25% on FDs e-ISA. To get 6.25% you would need to be paid the monthly interest of 6.08% for a FULL 12 MONTHS, they only pay this FOR 6 MONTHS.

Yes, if you compare for full 12 months.
NO - if you compare for 6 months. Do you argue that 6.25% AER for 6 months is better than 5.4% AER for 6 months?
O.K., let’s compare instead
6.08% with (1.054^(1/12)-1)*12=5.27% or
(1+0.0608/12)^6-1=3.08% with (1+1.054^(1/12)-1)^6-1=2.66%.
Does this make any difference?

By my calculations First Direct should be advertising their e-ISA at 5.3% AER

Yes, but this is only matter of advertising. However, for me, as soon as you have full flexibility to transfer, advertising 6.25%+4.35% is clearer than unintelligible 5.35%.

isasmurf

grumbler wrote:

NO - if you compare for 6 months. Do you argue that 6.25% AER for 6 months is better than 5.4% AER for 6 months?

My point is that if you invest for 6 months with FD, then you do not get 6.25%. As FD pay interest monthly to get 6.25% you would need to keep getting the 6.08% gross interest for the 6 months from October, as the 6.25% is calculated on receiving interest on interest paid during the year (i.e. compounding).

Yes, but this is only matter of advertising. However, for me, as soon as you have full flexibility to transfer, advertising 6.25%+4.35% is clearer than unintelligible 5.35%.

How is 5.35% unintelligible? Invest some money with Alliance & Leicester I know after a year I have 5.4% interest. Invest with First Direct I have to do some complicated to sums to know how much interest I would have got after 12 months. I would say 5.3% is clearer than 6.25% +4.35%. The 6.25% FD quote is a meaningless headline grabbing figure.

grumbler

isasmurf wrote:

My point is that if you invest for 6 months with FD, then you do not get 6.25%. As FD pay interest monthly to get 6.25% you would need to keep getting the 6.08% gross interest for the 6 months from October, as the 6.25% is calculated on receiving interest on interest paid during the year (i.e. compounding).

AER is Annual Equivalent Rate that allows you comparing different products not only on 1-year interval (I do not mean quite rare products where interest is calculated once a year). If you compare FD and A&L on 6-months period it is 6.25% (but not 6.08%) rate that you should use to compare with 5.4% AER. If FD advertise 5.3%AER how can I compare it with A&L on the first 6-months interval?

isasmurf wrote:

How is 5.35% unintelligible? Invest some money with Alliance & Leicester I know after a year I have 5.4% interest. Invest with First Direct I have to do some complicated to sums to know how much interest I would have got after 12 months. I would say 5.3% is clearer than 6.25% +4.35%. The 6.25% FD quote is a meaningless headline grabbing figure.

This is only because you did not go fo FD! If you did (for 6 months of course), you'd prefer 6.25%+4.35%... :rolleyes:

isasmurf

grumbler wrote:

AER is Annual Equivalent Rate that allows you comparing different products not only on 1-year interval (I do not mean quite rare products where interest is calculated once a year). If you compare FD and A&L on 6-months period it is 6.25% (but not 6.08%) rate that you should use to compare with 5.4% AER. If FD advertise 5.3%AER how can I compare it with A&L on the first 6-months interval?

Okay, lets look at it another way.

Lets say I have £1000 to invest. After 12 months with A&L I would get £54.00, if I left after 6 months I would get half that, £27.00. With First Direct, however, with an AER of 6.25% I would expect £62.50 for a full year and half that if I left after 6 months, so that would be £31.25. But I do not get half of that, I get less. I actually only get £30.80. You seem to be forgetting that the AER is equivalent to the compounded interest rates over a twelve month period. Two AERs over a 6 month period where one pays annually and one pays monthly are not comparable.

grumbler

isasmurf wrote:

You seem to be forgetting that the AER is equivalent to the compounded interest rates over a twelve month period. Two AERs over a 6 month period where one pays annually and one pays monthly are not comparable.

Neither FD nor A&L calculate interest annually! Even if FD pay interest annually they still calculate interest on daily basis. The calculations below are for monthly interest, but as you wrote above, difference is very small.
With AER 6.25% you can expect £1000*(1.0625^(6/12)-1)=£30.77 for the first 6 months.
With AER 5.40% you can expect £1000*(1.0540^(6/12)-1)=£26.65 for the first 6 months.

Now I give over trying to convince you… Let’s agree to differ. I think nobody around follows us already.:beer: