Interest calculation on Fixed Rate ISA

Mikeyorks

Thought I knew the answer to this ...but?

A number of my ISAs are fixed rate / fixed period .. with Halifax. I'd always assumed they compound the interest .. but the only info they provide is :-

Your interest rate is fixed for the period of your account and paid on maturity

.... which tells me when it's paid, but starts to raise some doubts as to how it's calculated? If I ring them twice - I'll get two different answers! And if I ring them just the once .. I'll be wondering?

Anyone got the definitive, please? Simple .. or the compound I somehow anticipated when I took them out.

masonic

Not a definitive answer, I'm afraid, but if interest is calculated on the balance of your account (T&Cs 5.1) and no interest is added to your balance until maturity, then that does not exactly set the stage for any compounding to take place.

Kazza242

Mikeyorks wrote:

A number of my ISAs are fixed rate / fixed period .. with Halifax. I'd always assumed they compound the interest .. but the only info they provide is :-

Halifax tend to pay the interest on their fixed rate ISAs on maturity, not during the term of the account. Unfortunately, this means that they don't benefit from compounding, since the interest is not paid into the account until maturity, there is no opportunity to earn "interest on your interest".

This is one of the main factors that has always put me off of Halifax's 2 year+ fixed rate ISAs, even when they were offering rates of 5.80% (for a 4 year fix) back in 2004.

RayWolfe

Not true!
I had this concern with Halifax so asked the question at the outset. Interest, whilst paid at expiry, is added annually and compounded. This has been confirmed by interest statements receive by me on second and subsequent years.

Cannon_Fodder

Presumably they would not be allowed to use AER and Gross pa, unless it was caculated and added annually...?

Cannon_Fodder

Presumably they would not be allowed to use AER and Gross pa, unless it was caculated and added annually...?

Chrismaths

No, they have to use AER and gross pa.

If you take a 4 year ISA that pays 5.8% gross pa, but only pays out at maturity, for each £1000 you save, you'll get back £232 in interest. That translates to an AER (annual EQUIVALENT rate) of 5.35% (1.232^(1/4)-1).

Kazza242

RayWolfe wrote:

Not true!
I had this concern with Halifax so asked the question at the outset. Interest, whilst paid at expiry, is added annually and compounded. This has been confirmed by interest statements receive by me on second and subsequent years.

I can remember Deemy complaining about Halifax failing to compound interest with their fixed rate isas. Whilst what you've said may be true for Halifax's fixed rate isa of the last couple of years, it was certainly not the case with Halifax's fixed ISAs before around 2003-4(?).

If they are compounding interest on their recent ISAs then that's great.:D

Mikeyorks

Grateful of the replies, thank you.

But as it still left me a bit short of 100% agreement - looked out all the documentation I'd got. Which tells me :-

Tax free interest is paid at maturity and added to your balance

and

…every day we work out the interest we have to pay you on your credit balance ….

The two, when taken together, appear to move in the direction of 'simple' interest? As the absence of any addition to the capital (not even a 'nominal addition' in there) seems to obviate compounding. But why, I ask, work out the interest daily if this is 'simple' ... and it's fixed rate / fixed period / fixed initial value .. therefore the capital is constant from Day 1? Surely you just do that at maturity, as there's no variable involved?

So I rang them! Didn't need two calls .. to get two different answers - got both in the same conversation! Totally charmless young lady - fresh from her assertiveness course - but deciding aggression was best (unusual for Halifax - normally find their knowledge a bit 'iffy .. but at least affable) - proceeded to simply repeat the bits (above) I'd already said I was aware of. Eventually clarified it was 'simple' interest - until I asked 'so that means no interest on the interest' - whereupon I was told 'yes, of course you get that'. Immediately followed by 'is the difference worth this enquiry'? Bit back the 'not if it means talking to you' - and pointed out it was worth £600 over the lifetime of the fixed ISAs I hold and 'trusted her day improved, as clearly it's not been good so far' .. as I put the 'phone down.

I've emailed Halifax simply to ask the question and said a one word definitive to the effect 'simple' or 'compound' will suffice. Will let you know when it is clarified as, to my surprise, after 30secs with the calculator last night ... it does amount to close on £600 for the fixed ISAs (3 x 2 for OH) I hold.

RayWolfe wrote:

This has been confirmed by interest statements receive by me on second and subsequent years.

Thanks for that. But I don't get statements for any of these ISAs. Purely an 'advice only' online view which simply shows the date of credit and the original £3k investment.

RayWolfe

Mikeyorks wrote:

Thanks for that. But I don't get statements for any of these ISAs. Purely an 'advice only' online view which simply shows the date of credit and the original £3k investment.

Well, DO let us know, but I do have the "evidence" of the calculations written on my leaflet by the advisor/salesman AND the paper statements sent out on the anniversary date.
I do agree that the documentation is less than helpful, that's why I asked at the outset.

Chrismaths

Tax free interest is paid at maturity and added to your balance

…every day we work out the interest we have to pay you on your credit balance ….

Is pretty self explanatory. You get 5.8% gross, paid at maturity, based on your daily balance. So simple interest, 5.35% AER. Contract T&Cs will always supercede the scribblings of low-skilled salesman.