Difference between AER, Gross and Net interest

Georgewoods

For an account paid monthly the net rate will be less than AER but when net is compounded it givesl the net AER . However savings accounts pay tax at point of payment, thus the gross rate is 0.8 of the net rate (simple deduction of 20% PAYE).

However the gross AER is less than 0.8 net AER, simply because the lesser interest gross does not compound pro rata relative to net. So You might imnagine that £10,000 earning 5% AER net would give you after 1 year £400 (£500 net *0.8) but it won't; typically you would be short-changed by about £2!

kingston101

Investment on 1 July 2010 repaid 1 August 2011 rate quoted is 2.50% AER but interest is paid only on 1 August 2011 ie. afer 13 months.
This is not AER is it?

oldfella

you should get 13 months interest - the meaning of AER is tightly defined, its what you will get for a 12 month investment. While it is often used for products that have other periods, it doesnt alter the meaning.

kingston101

Thanks for reply. Yes, I would get 13 months interest paid at the end of 13 months at 2.5% but how is that 2.5% AER if the period is lomger than a year?

oldfella

AER doesnt define the period of the investment - it defines what you would get if it was a year

for instance, a 6 month bond might be 2.5% AER, you will actually get more like 2.4% over 6 months. (ie 1.2%)

bigwuf

One point to watch out for when calculating interest amounts. Fortunately it only occurs every 4 years. Some financial instutions use a daily rate of 1/366 of the gross rate for the daily rate if February 29th falls in the account year. Others use 1/365 but do not pay interest for February 29th. Trying to find out which method is used can be tiresum. If is often buried in the samll print of the organsiations terms and conditions and is not always in the section about interest. Counter staff havn't a clue if they are asked.

But, surprise, surprise I have never found an organsiation the does not charge interest on a mortage for lending the money on February 29th.