How does 4.5% AER pay just £27 interest on £1,200 in a year?

WakeyTrawler

I am looking for a savings account for my young son and the best bet on MSE seemed to be the Halifax Kids Monthly Saver account. According to MSE, and the Halifax website, this account pays 4.50% gross/AER fixed for 12 months from account opening if you save between £10 and £100 each month by standing order. It also says that "This account has a fixed rate of interest so the rate won’t change during the term."

However, having applied for the account I've looked again at the illustration that Halifax give on their website for the return on investment and it says: "if you deposit £100.00 every month from account opening, the balance after 12 months will be £1227.00."  By my calculation that means that over 12 months you will have paid in £1,200 and earned £27 in interest, which equates to just 2.25%.

Have I got that completely wrong? I can't make the figures add up. Any explanation would be much appreciated.

strawb_shortcake

Because you don't have £1200 from day 1, 4.5% on £1200 from day 1 would earn around £48 interest, starting with zero and making regular payments is going to give a reduced amount of interest.

AnotherJoe

The first £100 is in for 12 months so you get 4.5% on that.

Next months £100  is only in for 11 months, so you get 11/12th of 4.5%

...

The last £100 is only in for one month so you get 1/12th of 4.5%

On average it works out roughly slightly more than half what you'd get if it was in for the full 12 months.

Duckyduck

You’ve got your sums wrong... you only earn interest on money in the account - in month 1 the balance earning interest is £100, in month 2 there is £200 and so on, the average balance is about 50% of the total you pay in and so the total interest is roughly 50% of final balance x interest rate.

ischris85

The calculation is 100*12*0.045/12*6.5

WakeyTrawler

Ah, thanks very much for the replies, got it now!
Cheers,
WakeyTrawler

mr_accountant

If you had £1200 in from day 1, you would only earn a £54 interest in a year, therefore half the amount is correct,

dcs34

You've probably figured it out by now, but relating it back to the title:

How does 4.5% AER pay just £27 interest on £1,200 in a year?

Because the £1,200 isn't in there for a year.
Work out the average balance for the whole year.
You'll earn 4.5% on that.

vernall

As a ROUGH guide with these type of accounts where you pay in a max amount a month then get % interest, just half the interest they say you will get and you won’t be far off

Notepad_Phil

vernall said:

As a ROUGH guide with these type of accounts where you pay in a max amount a month then get % interest, just half the interest they say you will get and you won’t be far off

Or as I prefer to think of it, halve the total amount that you'll have in there at the end and use the interest rate on that and you won't be far off. Assuming of course that you are putting in the same amounts every month.

ffacoffipawb

Notepad_Phil said:

vernall said:

As a ROUGH guide with these type of accounts where you pay in a max amount a month then get % interest, just half the interest they say you will get and you won’t be far off

Or as I prefer to think of it, halve the total amount that you'll have in there at the end and use the interest rate on that and you won't be far off. Assuming of course that you are putting in the same amounts every month.

Multiplying the interest rate or the total deposited by 13 / 24 gets very close.

Edit: Assuming paid in equal instalments.