MSE News: Santander to pay interest upfront but is it a good deal?

savetilibleed

mcdaly wrote: »

It makes sense to me. Get the interest upfront in time for christmas or better yet stick the interest you earn into their e-saver at 3.1% and compound it and you are quids in. On my calculations you will end up better off than the other 3 yr deals if you do this.

But then they are probably reckoning people treating it as a windfall and spending it, not further investing.

Consumerist

Further investigation of this offer on the Santander web site has left me a little bemused.

The web site offer is to repay £1,000 (within six weeks) of every £12,000 deposited in the bond.

So (ignoring the six weeks) you are effectively depositing £11,000 to get a maturity value of £12,000 in 3 years time. Now, that represents a return of £1,000 net for every £11,000 deposited for the duration. I make that an effective 3.68% AER (gross). So why does Santander prefer to advertise a lower rate of 3.36% AER?

It still does not beat the 4.3% AER available elsewhere (even if the £1,000 is re-invested at available savings rates) but it just seems a little odd to present it that way.

Any ideas, anyone?

hermante

Consumerist wrote: »

The web site offer is to repay £1,000 (within six weeks) of every £12,000 deposited in the bond.

So (ignoring the six weeks) you are effectively depositing £11,000 to get a maturity value of £12,000 in 3 years time. Now, that represents a return of £1,000 net for every £11,000 deposited for the duration. I make that an effective 3.68% AER (gross). So why does Santander prefer to advertise a lower rate of 3.36% AER?

That's not correct. You are not being "repaid" anything, you get £1000 (or £1250 gross) of interest immediately for every £12000 you deposit.

Deposit 12K now (or on 30 Nov to maximise interest earning period), get 1K in 6 weeks, get 12K back in 3 years.

£1250 for £12000 over 3 years is 3.3582%.

If you stick the 1250 into the esaver (assuming rate stays the same for 3 years, which it won't) you get 1369.89 back, so the overall rate would be 3.669%

As others have said it is a good deal if you 1) know you are going to move up a tax bracket in 3 years, 2) are lazy, and 3) don't already hate Santander.

Consumerist

hermante wrote: »

That's not correct. You are not being "repaid" anything, you get £1000 (or £1250 gross) of interest immediately for every £12000 you deposit.

But you are effectively "repaid" £1k of your £12k deposit (within 6 weeks) to leave only £11k of your money actually invested for the 3 years.

That £11k which you have actually deposited for the duration yields an additional £1k of net proceeds after 3 years (equivalent to £1.25k gross for basic-rate taxpayers).

If the £11k deposit grows to the equivalent of £12.25k (gross) in 3 years then I make that a return of 3.65% gross for a basic-rate taxpayer.

So the actual return on the £11k invested is higher than Santander's advertised 3.36%.

Again, not as good as the 4.3% AER available elsewhere, even if the up-front £1k is also invested at available savings rates.

Ilya_Ilyich

Yeah it does look like they're underportraying the interest. For a 3.36% AER deposit you'd end up with £1k after 3 years but with this you end up with £1k *now* which is more valuable. Presumably they have to advertise it this way for legal reasons.

dippy

Very clever!! To us, mr/ms everybody, we're only putting in 11K and earning 1K in 3 years.

To Mr Santader however, they now have 12K of deposit onto their books. Talk about creating money out of thin air, and they didn't even have to go through the expense of giving out a loan.

Ark_Welder

Is anyone considering not going for this particular offering but going with alternatives from Santander instead? Their 2-year bond pays 3.2% £500 to £5000, 3.4% £500 to £25000 and 3.55% above that...

Alternatively, The AA are doing 4.15% for 3 years, and the Post Office (didn't want to shout the name) are doing 4.21%.

msauk

The comments about Santander's upfront interest bond (3.36% gross/AER) being ideal for those moving up a tax band in the future are very relevant when making a comparison between this account and other 3 year bonds on offer. I am registered for gross interest in the current tax year, but will become a higher rate tax payer from 6 April 2013 onwards.

Taking Yorkshire Clydesdale bank as the comparator, currently offering 4.3% gross/AER annually, which then becomes 2.58% as a higher rate tax payer (i.e. 4.3*0.6) and £12000 as the deposit:

OPTION A - put the £12000 in Santander (locked for 3 years)
Receive £1250 interest upfront gross after 6 weeks of bond being open: (12000*(1.0336^3))

OPTION B - put the £12000 in Yorks/Clydesdale (locked for 3 years)
- at Dec 2012: receive £516 in gross interest (12000*1.043)-12000
- at Dec 2013: receive £322.91 in interest after higher rate tax taken off (12516*1.0258)-12516
- at Dec 2014, or bond maturity: receive £331.24 in interest after higher rate tax taken off ((12000+516+322.91)*1.0258)-(1200+516+322.91)
Total interest paid, assuming higher rate tax payer after first year, but registered for gross in first year = 516+322.91+331.24 = £1170.15

So, comparing Yorks/Clydesdale with Santander, and assuming a 12000 deposit being locked away for 3 years, you gain around £80 with Santander - BUT, of course you get the interest paid upfront from Santander, so the gain will be even higher assuming that the upfront interest is put in a good savings account immediately on receipt.

My question: I won't be able to deposit any capital until a current bond matures on December 13, 2011. Do you reckon Santander will close their upfront interest bond to new applicants by then?

Thanks,
M

hermante

msauk wrote: »

My question: I won't be able to deposit any capital until a current bond matures on December 13, 2011. Do you reckon Santander will close their upfront interest bond to new applicants by then?

Well from their website you can deposit from 2nd Nov, but

term starts 01/12/2011, upfront interest paid 01/12/2011, matures 01/12/2014.

so you'll need to borrow some money for 2 weeks, or miss out.

seggy1

no it is not as you have to put the £1000 in a lower interest account so you dont win

hermante wrote: »

Well from their website you can deposit from 2nd Nov, but

no its not you see you have to deposit that £1000 into a lower account its a fix so now you know that dont you


so you'll need to borrow some money for 2 weeks, or miss out.