More maths...

G_M

Santander 2 year ISA pays 2.3%. There's a 120 day loss of interest penalty for early closure.

What's the AER if I close early (say after 12 months)?

bigadaj

It's obviously going to vary dependent on the exact duration.

For a year then the loss of interest will represent one third of teh interest and assuming the 2.3% is aer then it should be slightly less than 1.6% earned for that first year.

I'm not sure whether that is actually an aer but should ne about what you'd get.

Chargem

G_M wrote: »

Santander 2 year ISA pays 2.3%. There's a 120 day loss of interest penalty for early closure.

What's the AER if I close early (say after 12 months)?

A guesstimate: 120 days is about 1/3 of a year, so if you lose 1/3 of the interest then you would get 2/3 of 2.3%, which is about 1.56%

This will probably be slightly out, but without knowing a few more facts (like how many days Santander use in a year for interest calculation purposes, and whether interest is paid monthly or yearly) I can't be more accurate.

YorkshireBoy

Approx 1.54% (if you close on the anniversary).

[Deleted User]

1.023^((365-120)/365) = 1.01538 = 1.538%

For durations other than a year, insert the appropriate period above.

bowlhead99

G_M wrote: »

Santander 2 year ISA pays 2.3%. There's a 120 day loss of interest penalty for early closure.

What's the AER if I close early (say after 12 months)?

It sounds like they're going to withhold about a third of a year's interest.

So depending on whether after reading the small print you simplify the maths to say:

- they literally withhold a rough third (120/365) of the first year's £230 interest per £10k invested;

- or they build it up daily and pay you the first (roughly) 240 days of a 360 day year that would compound up to £230 if it had happened every day,

- or they build it up monthly and pay you the first 8 of 12 chunks of interest that would have compounded up to £230,

- or they build it up in thirds and pay you the first 2 of 3 chunks that would have compounded up to £230

Either way you're going to get somewhere between 1.5 and 1.6% for your years deposit, after penalty.

If you hold out for longer (say a year and four months), you lose 4 months of interest but should get the £230 for the first year. 2.3% on your cash after waiting a year and four months is about 1.7% AER.

The longer you wait the better your effective AER because you are losing a smaller proportion of it to the penalty... presumably if you cashed in after just 4 months you would lose all the 120 days interest and get zero AER.

HTH

SnowMan

jack_pott wrote: »

1.023^((365-120)/365) = 1.01538 = 1.538%

For durations other than a year, insert the appropriate period above.

Of course you also need to annualise the resulting rate if using a period other than 1 year to get the effective AER rate. The extended formula required to do this is shown in cell B11 of this spreadsheet which does the general calculation (based on the yellow shaded cell inputs), which you can download or copy if you want to

https://docs.google.com/spreadsheets/d/1ezV1ILiEIDdsQBcOpT0YGvvl84MuiIJ4zj3TY_SOObg/edit?usp=sharing

Consumerist

There's a back-of-an-envelope calculation <here>.

Use 1/3 of a year as an approximation for the 120-day interest penalty.

Edit

After 1 year :-
2.30% pa for 1.0 yrs = 2.30% (interest for 1.0 yrs)
- 2.30 % for 0.333 yrs = - 0.77% (120-day penalty) [this would be the same in all cases]

Approximate return = 2.30% - 0.77% = 1.53% after 1 year. i.e 1.53% pa

[Deleted User]

G_M wrote: »

Santander 2 year ISA pays 2.3%. There's a 120 day loss of interest penalty for early closure.

What's the AER if I close early (say after 12 months)?

Why do you ask, are you wanting to decide whether a new account pays a high enough interest rate to cover the penalty on the old account and still come out ahead?

If so, the rate R, that you require on the new account to just cover the cost of closing the old one by the time it would have reached maturity is:

R = exp((1+P/T)*ln(E))

Where:

E is the rate on your existing account
P is the penalty time
T is the term remaining

So for example, with an existing rate of 2.3%, a 120 day penalty, and a year left to go:

R = exp((1+120/365)*ln(1.023))

=1.03067660299
= 3.07%

So you would need more than that rate to profit from the switch.

Consumerist

jack_pott wrote: »

Why do you ask, are you wanting to decide whether a new account pays a high enough interest rate to cover the penalty on the old account and still come out ahead?

I think the question was what the effective annual rate of return would be if the ISA was transferred before maturity. i.e. which would be a better rate, say, a 1.5% variable or the 2.3% fixed with the 120-day penalty? After a year the return would be about the same in this case.

[Deleted User]

Consumerist wrote: »

I think the question was what the effective annual rate of return would be if the ISA was transferred before maturity. i.e. which would be a better rate, say, a 1.5% variable or the 2.3% fixed with the 120-day penalty? After a year the return would be about the same in this case.

I was just wondering why the OP would be considering incurring penalties unless he's already got the 2.3% ISA, and is looking for a better one.

jack_pott wrote: »

R = exp((1+P/T)*ln(E))

Or alternatively,

R = [STRIKE]exp((1+P/T)*ln(E)) [/STRIKE]= E^((T+P)/T) :doh:

R = 1.023^((365+120)/365) =1.03067660299