Difference between AER and Gross interest rate ?

sparkiemalarkie

Investec have a 2year Fixed rate bond on HL. The rate is 4.70 % AER  and 4.81% Gross ....
It is the only savings account on HL that has this difference between AER and Gross...

I'm trying to work out if 4.75% with Close Brothers is better...

tia

sx

Ebe_Scrooge

There's a useful article here that explains it quite well: https://www.shawbrook.co.uk/direct/savings/aer-interest-explained/

<In my best BBC voice, "other explanatory articles are available" >

eskbanker

Can't see it myself, do you have a link or a screenshot perhaps?

AER will generally be the same as gross for accounts paying interest annually, or higher than gross for those paying monthly (reflecting the compounding effect), so 4.7% AER and 4.81% gross would be a strange combination....

Linton

How about...

In the second year you get 4.7% interest on the total of the initial contribution and the 4.7% interest from the first year.  Overall this gives  a factor of 1.096209 or an increment of 9.6209% overall.  divide by 2 gives 4.81% gross to 2 dec places.

eskbanker

Linton said:

How about...

In the second year you get 4.7% interest on the total of the initial contribution and the 4.7% interest from the first year.  Overall this gives  a factor of 1.096209 or an increment of 9.6209% overall.  divide by 2 gives 4.81% gross to 2 dec places.

My understanding is that this would be described as 4.7% gross and 4.7% AER - a quick look at a sample (linked from Moneyfacts) of two-year fixes paying annual interest endorses this....

Edit: apologies, you're right, it's different when the interest is only paid at maturity, so OP is presumably looking at a similar product to Raisin's version of this

https://www.raisin.co.uk/term-deposit/inv002-investec-2-year-fixed-term-deposit/

where AER is quoted at 4.75% and gross 4.86%

Sensory

Linton said:

How about...

In the second year you get 4.7% interest on the total of the initial contribution and the 4.7% interest from the first year.  Overall this gives  a factor of 1.096209 or an increment of 9.6209% overall.  divide by 2 gives 4.81% gross to 2 dec places.

On review, Investec does indeed pay 4.81% gross, with interest calculated daily. Total interest is credited as a single payment at the end of the fixed term, so the AER is an approximated rate that compounds annually.

sparkiemalarkie said:

I'm trying to work out if 4.75% with Close Brothers is better...

Normally, 4.75% AER > 4.7% AER, but Close Brothers doesn't allow interest to compound. AER alone cannot be relied on for comparing multi-year accounts if there are additional interest payments (before maturity) that cannot compound.

sparkiemalarkie

See private offer 
The interest headings are AER and Gross

sparkiemalarkie

Just been reading through the blurb with the savings products on HL ...should really have done that first before posting. It seems that the Investec account is better by a few pence


Investec 4.70 % AER  and 4.81% Gross interest on £1000 after 2 years

Close Brothers 4.75% interest on £1000 after 2 years

Sensory

Interest is paid away annually for Close Brothers so it cannot compound the next year, which accounts for the difference. Even so, you're better off choosing Investec through Raisin instead of HL.