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How do bonus rates work?

Jevvers
Posts: 650 Forumite


Hi all
I've been thinking that bonus rates for a year on an ISA mean that you have to keep your money in for 12 months otherwise you'll get the lower (non-bonus) rate.
But, I suddenly realised (I hope) that with interest calculated daily you get that interest from day 1. Is this right?
I had been put off bonus rate ISAs because I thought I wouldn't be able to transfer within the first year but I now think I've been wrong...
Thanks and Happy EAster
I've been thinking that bonus rates for a year on an ISA mean that you have to keep your money in for 12 months otherwise you'll get the lower (non-bonus) rate.
But, I suddenly realised (I hope) that with interest calculated daily you get that interest from day 1. Is this right?
I had been put off bonus rate ISAs because I thought I wouldn't be able to transfer within the first year but I now think I've been wrong...
Thanks and Happy EAster
0
Comments
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It depends on how each individual product is worded. Some bonuses are conditional - an example being the Halifax Direct ISA Reward (now unavailable to new customers) with a rate of 3%, but a bonus of 0.2% is payable at 12 months if you also hold a current account with them for that period.
Most bonuses tend to be unconditional and run from account opening for a maximum of 12 months, so will apply up until the point where you transfer out, if you choose to do so within that 12 month period.
However, not all bonuses are fixed, Santander's bonus on its instant access account is variable, so it could be reduced (or arguably increased) during the 12 months. It is not clear from their respective websites whether Skipton's or Principality's instant access accounts' bonuses are fixed or variable.I came, I saw, I saved.
Campaign for the Abolition of Political Parties - find us on Facebook0 -
Thanks, that's all v useful.0
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99 times out of 100 you will still receive the bonus rate if you transfer out before the year is up.
Just make sure you check though.0 -
May I pose a more philosophical question about instant access ISA bonus rates? (I am trying to get a "perspective" on these particular mechanisms which banks and building societies use to attract savers.)
Variable rates are straightforward - they can change at any time and it is beholden upon the saver to regularly monitor their accounts and their associated interest rates. I get that.
Fixed rates are equally straightforward. Keep your money in the account for the stated term and you have a guaranteed interest rate. Better rates, less monitoring, but more risk that you might get locked into a less competitive rate. I get that as well.
Bonus rates. Here's the thing - are they better or worse?
A "worse perspective" is that they allow the provider to offer headline-grabbing rates. However, the variable element of the interest rate may change at any time, (probably downwards for the near future). This may leave you with the equivalent of a fixed rate account offering poor interest. (Example: Skipton Bonus Cash ISA offers 3.1% of which 1.05% is a fixed bonus. So, at any time during the 12-months the variable element could reduce dramatically leaving a rate - at worse - of 1.05% . Regular monitoring is necessary.)
An alternative "better perspective" is that bonus rates effectively offer guaranteed interest for the given term with the added benefit of instant access. (Example: AA Savings Internet Access ISA 3 offers 3.5% of which 3% is a fixed bonus for 12-months. Even if the variable element disappears altogether, the fixed bonus remains attractive.)
So where do the fixed bonus accounts "fit"? Are they better or worse than a standard variable rate account? Where's the "angle"?
I can't quite make my mind up about these things and would welcome any additional insight. (Apologies for the lengthy post.)0 -
Bonus rates. Here's the thing - are they better or worse?
A "worse perspective" is that they allow the provider to offer headline-grabbing rates. However, the variable element of the interest rate may change at any time, (probably downwards for the near future). This may leave you with the equivalent of a fixed rate account offering poor interest.
I don't understand how you are left with the equivalent of a fixed-rate account offering poor interest.
Fixed-term and fixed-rate tend to go hand in hand. Rare for a fixed-rate account to offer instant-access (or even further deposits). And rare for a fixed-term account to offer variable-rate interest. (There are some trackers with a fixed increment above base rate.)
So if we treat them as synonymous, I don't think an instant-access account with a fixed bonus can in any way be compared with a fixed-rate / fixed-term account.
Even in the case when the bonus is conditional on the account being open on the anniversary, you just need to withdraw all but £1 and move the money elsewhere. The bonus amount has to be calculated daily and paid conditionally (otherwise savvy savers would dump a load of money into the account the day before the interest is calculated).
On the anniversary, you'll receive the full headline rate for the money all the time it was in the account. Can't expect any more or any less.
(I guess you do need to watch out for conditional bonus and a minimum balance, I guess.)0
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