Interest rate help 25 November 2022 at 5:26PM in Savings & investments 11 replies 651 views

Jayjay08

Can someone explain to me how the total balance after a year of this example is what it is? 

I had been looking at taking this account out but I can’t see how there’s only £162 interest at 5%. It’s calculated daily.

https://www.ybs.co.uk/savings/regular-saver

ColdIron

Because you don't put in the full £6,000 at the start. Your average balance across the year would be £3,000

Aretnap

Are you thinking that the correct interest should be 5% of £6000, or thereabouts? It's a common mistake.

As it's a regular saver you don't have the full balance in there for a year - only the first £500 gets the full 12 months interest. The second £500 gets 11 months interest... And the last £500 gets a mere 1 month's interest.

Overall it works out as about half the "headline" rate, depending on exactly when you start saving (as not all months are the same length), and plus a little for compounding.

cymruchris

In the first month you deposit £500, you get your interest on £500 for that month in your case daily - but I'm going to do it monthly so you can understand the principle of what's going on. (You get 1/12th of 5% - £2.08 interest approx)

In the second month you deposit £500, you get your interest on £1002.08 for that month. (1/12th of 5% - £4.17 interest approx)

In the third month you deposit £500, you get your interest on £1506.25 for that month. (1/12th of 5% - £6.27 interest approx)

4 - £2012.52 (£8.39)

5 - £2520.90 (£10.50)

6 - £3031.40 (£12.63)

7 - £3544.03 (£14.77)

8 - 4058.79 (£16.91)

9 - 4575.70 (£19.65)

10 - 5094.76 (£21.23)

11. £5615.99 (23.40)

12. £6129.38 (£25.58)

Total: £6154.95 (This is different to your total illustrated - as I'm calculating monthly - and they are calculating daily - but you can see how it works - it would do the same for each of the days - 1/365th - some months are longer than others - so that would have a minor impact on the total as well as your £500 wouldn't be deposited on exactly the same timescale each time) (I think I've got my maths right - but happy to be corrected if I'm wrong)

You're not getting 5 percent interest on £6000 if that's what you're thinking, as the £6000 isn't all there from day 1. 

The 5 percent interest is for a year - so each month they pay interest you get 1/12th of the 5 percent - or as you mention interest is calculated daily - so each day you'll get 1/365th of 5 percent of whatever the balance is that day. Each time you go up £500, the 1/365th will be a little more in £ note terms. 

Sensory

Jayjay08 said:

It’s calculated daily.

This means the gross interest rate (5.00%) is divided by the number of days in a year (365 or 366), then multiplied by the account balance at the end of each day. The result is daily interest which accrues (but is not paid) in increasing amounts as you gradually add to the balance. After 365 days, all the accrued interest is paid.

Jayjay08

Thanks for the replies, I see where Iv went wrong. I was seeing 5% on every deposit that went in plus the previous deposits.

so is this case scenario the same for all savings accounts? 

Sensory

Jayjay08 said:

so is this case scenario the same for all savings accounts?

Interest rates are annual figures, and daily interest calculation is standard for savings, loans, mortgages etc., especially in the UK.

As always, check the terms and conditions, but anything else is uncommon.

RG2015

Jayjay08 said:

Thanks for the replies, I see where Iv went wrong. I was seeing 5% on every deposit that went in plus the previous deposits.

so is this case scenario the same for all savings accounts? 

It is the same for regular savers with a maximum monthly deposit limit, such as £500 in your example.

However, Barclays have an account which pays 5% on up to £5,000 which can be deposited on day 1.

In this case, after 1 year the interest earned on £5k will be £5,000 x 5% which is £250.

Jayjay08

Sensory said:

Jayjay08 said:

so is this case scenario the same for all savings accounts?

Interest rates are annual figures, and daily interest calculation is standard for savings, loans, mortgages etc., especially in the UK.

As always, check the terms and conditions, but anything else is uncommon.

So this account is relatively good for saving 5k a year at regular monthly deposits? 

cricidmuslibale

Jayjay08 said:

Sensory said:

Jayjay08 said:

so is this case scenario the same for all savings accounts?

Interest rates are annual figures, and daily interest calculation is standard for savings, loans, mortgages etc., especially in the UK.

As always, check the terms and conditions, but anything else is uncommon.

So this account is relatively good for saving 5k a year at regular monthly deposits? 

Yes, with the 5% interest rate and a £500 maximum deposit per month it is very good for saving £5k a year with regular monthly deposits! It is even better for saving £6k a year in the same way!

zagfles

Approx formula for regular saver interest is 6.5 x monthly deposit x interest rate/100

Exact will depend on exact days between deposits but will be within a pound or two of above.