Overpaying Mortgage VS Savings

AnotherJoe

bowlhead99 wrote: »

Lack of numeracy doesn't help but these people with poor maths skills are not being 'ripped off' when a bank accepts £250 a month from them and pays an AER of 5% on every penny on it (ten times the BoE base rate)

... for just one year and then the merry go round starts again.

Bravepants

AnotherJoe wrote: »

... for just one year and then the merry go round starts again.

Exactly...it's the same effect as dangling string to make kittens dance.

Bravepants

bowlhead99 wrote: »

I have to disagree a bit with the way you're presenting this.

No, of course they don't pay interest on money that you COULD pay in if you were allowed to deposit all your worldly wealth in one go. They just pay interest on what you DO pay in, while a second bank or building society will pay you interest on the money that you DO pay to them and don't pay to the first place.


Having accounts that other people don't match, is good advertising

They COULD, but you would have to miss out on being able to put part of that £6k elsewhere for much of the year.

i.e., financially they could do it, because it would cost them only the same amount of cash interest as what they were paying on only £500 a month of your money being deposited into the account, yet they would have all £6k on your money for all of the year. It would be a good win for them and a loss for the consumer who would need to find all that money up front and could not save or invest it elsewhere to earn further interest.

Some customers like you are out for the lazy life and would prefer to get less overall interest by just putting the whole money into the account at the start and getting a lower rate, rather than getting the same amount of cash interest from drip feeding the account at a higher interest rate *and* having some interest earned on the rest of your money elsewhere. There are many people like you who are out for the simple life.

However what these accounts are, are accounts that accommodate people who are 'regularly saving'. Many can't deposit £3k or £6k in month one because they are waiting for an employer or pension fund to send them monthly earnings which is how they would fund the account. So what you are saying is please slash the rate to 2.7% for those people because you prefer the account to have a lower rate and allow a higher initial deposit because you are wealthier. Well, good for you.

Also, their market research will tell them that if you are regularly engaging with them (making ongoing deposits, watching your balance rise) you might be more likely to be tempted to buy other products which make money for them and help subsidise the product. The subsidy from the cross selling model makes it possible for them to make more total interest available to you on the account.

The implications are that you can't put all your entire wealth into the account on day one and instead are restricted to paying in only £x per month or whatever the limit is. Anyone with a brain will see on the sign-up page the key facts on how much they can pay in.

What you're saying is that those people are misled because they assume they will get paid interest on money that isn't in the account and is instead earning money for them in some other bank account, or is in their employer's bank account because they haven't earned the money yet.

Well, you can't help some people being duped because they don't think things through, but no need to change the rules for everybody just to accommodate the slow ones

You do *literally* get the advertised rate (in terms of AER) for everything that is put in. Every single pound in the account earns the [5% or whatever] AER, pro rated for the number of days the money is in the account which is how all accounts work.

What happens is the 'everything that can be put in' is restricted so they only pay interest on the money they want to receive because that's all they'll accept into the account.

The simple life pays you base rate 0.5% , libor or potentially a bit more or less depending on the banks own operating costs or whatever the market will stand for the money you have available to put in.

If you want to get the best rate, you are going to have to look hard for it or work hard to qualify for it. Why should you deserve to be paid a special 'higher than base rate' on all your money without any effort on your part. Does the world owe you a living?

If you have pots of cash I'm sure it would be nice to get paid a high interest rate just for sitting back and doing nothing. Maybe the government should regulate it and you wouldn't need to seek out offers because all banks have to offer the same rates regardless of their business model or appetite for certain types of business. One would imagine such rates would *not* a be very high.

So, meanwhile back in the real world... That doesn't happen.



Yes, it has always been the way, people who are greedy and "eager to get their money working" won't take time to read the facts they're presented with because of their greed overruling their sensibilities Lack of numeracy doesn't help but these people with poor maths skills are not being 'ripped off' when a bank accepts £250 a month from them and pays an AER of 5% on every penny on it (ten times the BoE base rate)

Thank you Bowlhead, I appreciate the time you have taken to answer. Horses for courses at the end of the day.

bowlhead99

Bravepants wrote: »

Exactly...it's the same effect as dangling string to make kittens dance.

Kittens *like* to dance, or so it seems, for the eventual rewards (cuddles, or the person looking after them and buying them food because the person enjoys having a fun pet, etc).

If people did not dance, and it was not worth them trying to tempt some of your business away from a rival financial institution, they wouldn't do it.

But would you prefer the banks to *not* compete for your business and not dangle string, nor pay for your dinner after you flirted with them?

It's how the world works etc. Sometimes we think it was better in the old days, just like the people in the Soviet Union a few decades ago were used to the simpler times of not being able to have more than one state sponsored supplier for their services and not being able to go to McDonalds for lunch if they fancied it. Some hark back to those 'simpler' times and the others accept the benefits of progress and capitalism

ColdIron

Bravepants wrote: »

It would be better and clearer if they said, "Pay in your £6k, leave it there for a year and we'll give you 2.7% at the end of the year"...the banks COULD say and do that couldn't they?

They could but it would be wrong

Stella Artois has an Alcohol By Volume strength of about 5%. If you drank one pint of wife beater on Monday and only half a pint on Tuesday would you complain on Wednesday that you only got 3.75% ABV?

Bravepants

ColdIron wrote: »

They could but it would be wrong

Stella Artois has an Alcohol By Volume strength of about 5%. If you drank one pint of wife beater on Monday and only half a pint on Tuesday would you complain on Wednesday that you only got 3.75% ABV?

Your analogy doesn't work.


I don't get another percentage of alcohol on Tuesday from the pint I drank on Monday.

ColdIron

It works just fine. The point it illustrates is that both are rates and that rates apply irrespective of amount. You receive 5% interest regardless of how much you have in the account in the same way that you receive 5% ABV regardless of how much you drink

Bravepants

ColdIron wrote: »

It works just fine. The point it illustrates is that both are rates and that rates apply irrespective of amount. You receive 5% interest regardless of how much you have in the account in the same way that you receive 5% ABV regardless of how much you drink

If I drink a pint a day from Monday to Friday, I will get 5% ABV on Monday from 1 pint, on Tuesday from 1 pint, on Wednesday from 1 pint etc. Previous days' pints don't contribute to the actual additional alcohol in my system; each of the previous pints I have drunk do not add more alcohol. You can quote rates left right and centre but what is important is the actual amount of alcohol in my system.


However, monthly payments do accrue interest and in subsequent months I add a new payment, the previous months' accrue interest too. This is not the same as your analogy.


My point is that you are only allowed to pay in a relatively small amount monthly. You are not FREE to pay in as much as you want and get the 5% interest rate across the total that you have available to pay in. This is fine. But the actual cash you get back in interest (not the rate, but the cash) is equivalent to about 2.7% on the full amount that you have available to drip feed in.

eskbanker

Bravepants wrote: »

It would be better and clearer if they said, "Pay in your £6k, leave it there for a year and we'll give you 2.7% at the end of the year"...the banks COULD say and do that couldn't they?

But no, 5% looks better on their websites as it's a huge eye catching rate, and some poeple just don't get the implications of being forced to drip feed.

You're not the first and won't be the last to misrepresent regular saver interest as being half the published interest rate on the whole closing balance, but to me it's always far more logical, realistic and helpful to consider it as the full interest rate but on half the final balance, as that's the average over the year.

I'll give the :beer: analogy a miss, it's still :coffee: time for me....

jimjames

Bravepants wrote: »

It's all very well advertising an "interest rate" of 5%, but they limit how much you can pay in so they don't pay the cash equivalent of a year's worth of interest at 5% on all of the money that you COULD pay in...one HAS to drip feed..

All regular savers are very clear about the amounts you can pay in. They won't say pay in £6k because you can't - the account doesn't work that way.

Maybe you need to find a bank that will charge interest on your mortgage based on the balance at the start of the year rather than the amount you owe as it sounds like it would make it easier for you to understand.