Better to have interest monthly or yearly if compounding?

fimonkey

I always assumed it was better to have interest paid monthly if the interest was going to be added onto the balance and not touched, as then you earn interest on your interest. i.e compounding. Right or wrong?

Why, on the moneysupermaket website, is the Coventry BS online saver offers an option of earning 6.51% on savings, which has an AER of 5.06% if interest is paid monthly but AER of 5.21% if you go for the yearly option?

Using the example above, if I had 30K in this account for year, what would the interest be if it was paid yearly (after tax, I'm a BR payer) and monthly if the interest was left where it was and allowed to 'compound'?

Also, would it be worth moving this 30K from the A&L direct saver account paying 6.25% Gross monthly to the Coventry, but I loose a months interest from A&L if a withdrawal is made. I intend to not touch this money for a year, so would the higher interest rate make up for the months loss of interest?

Thanks in advance

debbie42

fimonkey wrote: »

I always assumed it was better to have interest paid monthly if the interest was going to be added onto the balance and not touched, as then you earn interest on your interest. i.e compounding. Right or wrong?

Why, on the moneysupermaket website, is the Coventry BS online saver offers an option of earning 6.51% on savings, which has an AER of 5.06% if interest is paid monthly but AER of 5.21% if you go for the yearly option?

Using the example above, if I had 30K in this account for year, what would the interest be if it was paid yearly (after tax, I'm a BR payer) and monthly if the interest was left where it was and allowed to 'compound'?

Also, would it be worth moving this 30K from the A&L direct saver account paying 6.25% Gross monthly to the Coventry, but I loose a months interest from A&L if a withdrawal is made. I intend to not touch this money for a year, so would the higher interest rate make up for the months loss of interest?

Thanks in advance

If it's exactly the same rate then it's better to have it added monthly, for compounding reasons. However, it's normally accounted for when you have the option. You may find a better gross rate for yearly paid as compared with monthly (similar) accounts: the AER may turn out to be the same. If you're trying to compare accounts then it's the AER that's the important number to look at.

The general advice regarding the A&L savings is that if you want to make a withdrawal then take out the whole lot at the beginning of the month. There's little point in leaving money in there if it's not getting any interest. There was a thread on it somewhere on here.

No idea on the coventry rates: it looks a bit odd, but may have some bonuses attached, or something?

fimonkey

debbie42 wrote: »

If it's exactly the same rate then it's better to have it added monthly, for compounding reasons. However, it's normally accounted for when you have the option. You may find a better gross rate for yearly paid as compared with monthly (similar) accounts: the AER may turn out to be the same. If you're trying to compare accounts then it's the AER that's the important number to look at.

Thanks, that's what I thought, so why on moneysupermarket, are two different AER's quoted for the same GROSS interest, the higher AER being the yearly option? (No bonuses as far as i can tell, same account, one with monthly interest, one ith yearly interest),

debbie42 wrote: »

The general advice regarding the A&L savings is that if you want to make a withdrawal then take out the whole lot at the beginning of the month. There's little point in leaving money in there if it's not getting any interest. There was a thread on it somewhere on here..

Cheers for that, my other question should have been ...."should I take out the whole lot (at the beginning of the month) and move it to the Coventry BS" ... presuming it'll take about 5 days to transfer across via internet, would the loss of interest on 30K be worth it for a 0.2% interest rise on a 30K balance?

YorkshireBoy

fimonkey wrote: »

Why, on the moneysupermaket website, is the Coventry BS online saver offers an option of earning 6.51% on savings, which has an AER of 5.06% if interest is paid monthly but AER of 5.21% if you go for the yearly option?

The 5.21% and 5.06% figures you quote are not AER's, they're gross p.a. rates after tax. It doesn't matter with this account whether you have your interest paid monthly (and leave it in there to compound) or have it paid annually. Each option will deliver 6.51% AER.

Using the example above, if I had 30K in this account for year, what would the interest be if it was paid yearly (after tax, I'm a BR payer) and monthly if the interest was left where it was and allowed to 'compound'?

Annual
£30,000 x 6.51% x 0.8 = £1,562.40

Monthly
£30,000 x 6.32% / 365 x n x 0.8 =
Where n = number of days in month

So, assuming account opened 1st November, November's interest will be...

£30,000 x 6.32% / 365 x 30 x 0.8 = £124.67

...and for December...

£30,124.67 x 6.32% / 365 x 31 x 0.8 = £129.36

...and so on.

At the end of the 12 months, the sum of all your monthly interest payments will be very close (actually just a bit less due to monthly taxation) to the annual figure of £1,562.40 (providing you leave the interest to compound in the account).

Also, would it be worth moving this 30K from the A&L direct saver account paying 6.25% Gross monthly to the Coventry, but I loose a months interest from A&L if a withdrawal is made. I intend to not touch this money for a year, so would the higher interest rate make up for the months loss of interest?

I don't think it's possible to withdraw from the Coventry account without losing 30 days interest on the amount withdrawn is it? If you need it all, that's a twelfth (or 8.5%) of your interest lost!!. You'll have to crunch some numbers and see if it's worth it.

Stompa

fimonkey wrote: »

I always assumed it was better to have interest paid monthly if the interest was going to be added onto the balance and not touched, as then you earn interest on your interest. i.e compounding. Right or wrong?

Wrong. It's generally compounded daily anyway. All other things being equal, you're actually better off having it paid yearly - that way you earn some interest on the tax you would otherwise have paid monthly. Mind you, the difference is pretty minimal!

purch

It's generally compounded daily anyway

Wrong !

Interest is CALCULATED daily

It can only COMPOUND when it is added to the account

Stompa

purch wrote: »

Wrong !

Interest is CALCULATED daily

It can only COMPOUND when it is added to the account

Oops, yes you're correct of course - I picked the wrong C word there!

Aegis

Stompa wrote: »

Oops, yes you're correct of course - I picked the wrong C word there!

I did that recently too...

A day or two before I took my first CeFA module, which was quite worrying at the time!