Working out interest help.

isasmurf

Let's take ING as an example.

They pay 5.00% AER, 4.89% Gross and you have £1000 in the account.

ING will pay you 1/12th of 4.89% of the £1,000 in month 1, i.e. £4.08.
You take the interest out, ING will pay again pay 1/12th of 4.89% of the £1,000 in month 2 so you get £4.08 and so on. So if you take the interest out every month you will have got paid £48.96 in interest.

However if you leave the first months interest in the account then ING will pay 1/12th of 4.89% of £1004.08 in month 2, i.e. £4.09
and so on.

If you leave all this interest in over the year then the balance at the end of the year should be £1050, i.e. 5% of £1000, even though you never actually got paid 5% interest at any time.

Is that any clearer. I think I've confused myself. :eek:

grumbler

isasmurf wrote:

Is that any clearer.

YES. This is what I supposed.
However, I still cannot get Halifax's 7.07% out of 7% or vise versa...

deefadog

Thanks isasmurf, so AER is componded interest over the year, yes?

I am with grumbler, don't get the 7.07%?

Paul_Varjak

grumbler wrote:

Yes, this is correct.
For Halifax now they advertise '7% AER/gross p.a'. I think I also have seen something like 7%AER/7.07%gross before.

If the gross/AER figures are the same this would indicate that interest is compounded annually. If the AER figure is higher than the gross figure this would indicate that interest is compounded more frequently than annually. If the gross figure is higher that the AER then interest is compounded less frequently than annually

Actually, Halifax used to quote 7.07% AER / 7% Gross. That would make sense if interest was compounded more aften than annually (six-monthly at a guess). But I would not how to do the calculation. Grumbler can you help?

So, has the Regular Saver account changed to annual compounding, or was the 7.07% AER originally quoted erroneous? I don't remember the AER/Gross figures differing when they were offering 6% on this account so, I guess, they just made a mistake in originally quoting 7.07% AER on this account?

grumbler

Paul_Varjak wrote:

Actually, Halifax used to quote 7.07% AER / 7% Gross. That would make sense if interest was compounded more aften than annually (six-monthly at a guess). But I would not how to do the calculation. Grumbler can you help?

six-monthly (1+0.07/2)^2-1=0.0712
three-monthly (1+0.07/4)^4-1=0.0719
monthly (1+0.07/12)^12-1=0.0723
:mad:

Paul_Varjak

Grumbler:

Looks like that Halifax were quoting an erroneous AER figure then?

Paul_Varjak

grumbler wrote:

As far as I understend AER and Gross interest rate are the same. However, sometimes banks publish AER and gross rate slightly different. I do not know why.
Can anybody explain this?

The AER (Annual Equivalent Rate) was introduced so that the comparison of monthly interest paying accounts with annual-interest paying accounts is made easier.

If the gross interest on a monthly paying account is the same as the gross interest on a yearly-paying account, the monthly-paying account is actually a higher interest account, reflected in a higher AER.

If the AER on a monthly-paying account is the same as the AER on a yearly-paying then the two accounts are equal in terms of the interest they would pay over one year.

In other words, the AER on a monthly-paying account, shows what the gross interest would be on an annual-paying account. By definition, the AER on an annual paying account always equals the gross rate.

grumbler

Very clear explanation!
If combined with isasmurf's numerical example in post #12 this is better than anything in the FAQ sticker and deserves to be added there.

deefadog

I agree, even i understand it LoL Also you might want to add something like this, really simple terms so people can understand (just an example, may have got it wrong) -

If you are saving a lump sum for 1 year with no monthly deposits - (gross is the best deal for you)

If you are saving a monthly deposits - (AER is the best deal for you)

etc etc


You know what i mean, so somone can quickly look at it and know exactly what they should be looking for.


Just to get back to my savings accounts -

I can't go with the HSBC, So is the Halifax regular savings the best at the moment for me?

And if i switch from ING to A&L and put £2000 in there and drip feed it monthly into the Halifax - 7x£250+5x£50

Is this the best deal around for me at this time?

Thanks for all the help!

grumbler

deefadog wrote:

I can't go with the HSBC, So is the Halifax regular savings the best at the moment for me?

And if i switch from ING to A&L and put £2000 in there and drip feed it monthly into the Halifax - 7x£250+5x£50

Is this the best deal around for me at this time?

Thanks for all the help!

YES, YES amd YES
However, be aware that you cannot setup a Standing Order from A&L online saver. It only can be linked to some other current account. If this current account is not with A&L this means extra time lost on transfers that almost devalues its 0.35% advantage as against ING.