Interest paid yearly

DavidLaGuardia

opinions4u wrote: »

Interest payable is not calculated by the AER though.

The gross annual rate is the contractual rate to use for calculating interest. AER is merely a notional rate for use in comparing accounts. While it's fine for doing just that it's incorrect to use AER to calculate interest payable.

I think Yorkshire Boy's post is fine.

I agree that AER is to compare accounts, but IF the interest rate is based on an annual payment, then most accounts will not pay a simple divisision of the interest, or they will be paying more than they need to. It really will be on an AER basis - unless you can show me otherwise! (I don't mean this arrogantly and I'm open to be corrected).

If it were not the case one could open an account and hold it for less than a year then transfer the balance over to one's wife or husband on a certain day and compound up a greater rate for the rest of the year - which may be significant on large amounts. I don't see this being possible.

opinions4u

DavidLaGuardia wrote: »

I agree that AER is to compare accounts, but IF the interest rate is based on an annual payment, then most accounts will not pay a simple divisision of the interest, or they will be paying more than they need to. It really will be on an AER basis - unless you can show me otherwise! (I don't mean this arrogantly and I'm open to be corrected).

If it were not the case one could open an account and hold it for less than a year then transfer the balance over to one's wife or husband on a certain day and compound up a greater rate for the rest of the year - which may be significant on large amounts. I don't see this being possible.

Only Egg calculate interest the way you suggest. Last time I looked they were paying a top rate of 0.60% so I don't care. The different calculation is highlighted in their T&Cs.

You could potentially close an account elsewhere every day and move funds to another one, which you then also close, and gain the way you suggest.

If you were to do so a more sensible 12 times a year, rather than the 365 suggested in the sentence above, you'd turn the usual £30 a year interest on £1,000 at 3.00% gross in to a stunning £30.40 or thereabouts. It's not something that bank customers are doing in their tens of thousands so not a significant concern for any savings provider.

YorkshireBoy

David,

There's lots of information on the BBA website about interest rate calculations.

I'm not absolutely certain why you're disagreeing with the point I made earlier (that interest accrues daily at 'CB x gross p.a.% / 365' on the LTSB eSavings account), but perhaps this 'code of conduct guidance document' - specifically point 8 - will help you understand the 'actual/365" basis of the calculation...

http://www.bba.org.uk/media/article/code-of-conduct-for-the-advertising-of-interest-bearing-accounts

mgarl10024

YorkshireBoy wrote: »

closing balance x gross p.a. rate / 365

or 366 in a leap year.

YorkshireBoy

mgarl10024 wrote: »

or 366 in a leap year.

Not necessarily! dividing by 366 is optional. See the aforementioned BBA document point 8.

mgarl10024

YorkshireBoy wrote: »

Not necessarily! dividing by 366 is optional. See the aforementioned BBA document point 8.

http://www.bba.org.uk/media/article/code-of-conduct-for-the-advertising-of-interest-bearing-accounts says "or by 365 or 366 days in a leap year".

Good call - I bow to your superior knowledge.

DavidLaGuardia

YorkshireBoy wrote: »

David,

There's lots of information on the BBA website about interest rate calculations.

I'm not absolutely certain why you're disagreeing with the point I made earlier (that interest accrues daily at 'CB x gross p.a.% / 365' on the LTSB eSavings account), but perhaps this 'code of conduct guidance document' - specifically point 8 - will help you understand the 'actual/365" basis of the calculation...

http://www.bba.org.uk/media/article/code-of-conduct-for-the-advertising-of-interest-bearing-accounts

It was a misunderstaning on my part, I had assumed that AER would be a consistent return - however long the savings account was held. This would be technically more correct in terms of an Annual Equivalent RETURN if not (I have now learned) what is defined by the BBA for Annual Equivalent RATE.

The key to this is in the link you posted. It states that:
"AER stands for Annual Equivalent Rate and illustrates what the interest rate would be if interest was paid and compounded once each year."

The "once each year" is the key phrase. As the banks generally do apply a daily rate of 1/365 of a gross amount for any incomplete year of investment, this leads to the interesting phenomenon of this partial-year having a higher AER (by the correct definition as oposed to the yearly one in the BBA guidance). It is also inconsistent with the way in which APR must be calculated for lending.

This does not appear to be a problem as paying a marginal higher amount is neither shortchanging the customer comnpared to the advertised BBA AER nor, as opinions4u says, something likely to be of concern to those who provide savings accounts (especially on low interest rates)

Thank you.....I have learned something new here! :beer:

pqrdef

opinions4u wrote: »

If you were to do so a more sensible 12 times a year, rather than the 365 suggested in the sentence above, you'd turn the usual £30 a year interest on £1,000 at 3.00% gross in to a stunning £30.40 or thereabouts.

And if income tax is deducted, it's deducted every time interest is credited, so only the net gets compounded.

DavidLaGuardia

pqrdef wrote: »

And if income tax is deducted, it's deducted every time interest is credited, so only the net gets compounded.

£30.33 gross equivalent then!