Transfer a low interest rate before maturity to a higher interest rate

heland_savings

I'm trying to work out whether it's worth moving my fixed 1.86% 2 year Isa before maturity (30th April 2024) to a much higher 1yr fixed rate Isa at 5.20% with another provider. I know there will be a penalty, a loss of 180 days of interest. I have just over £31,000 in this Isa, The bank have quoted an estimated figure I would receive if close the account now of £30,916.69 (loss of £83.85).

However, If I invested this £30,916.69 in to the better rate Isa of 5.20% then it would earn £1,205.75 (from August up to 30th April). Therefore £1,205.75 interest - the £83.85 loss = £1121.90 gain. So it's a no brainer and worth taking the penalty charge. Is this correct? Am I working this out correctly before I move the Isa.

Your advice would be much appreciated.

boingy

Calculator: Should I ditch my fixed cash ISA? - use MSE's switching calculator to find out (moneysavingexpert.com)


Edit: my ballpark calc of your interest penalty comes out at over £280.
180 days of 1.86% on £31,000

Johnjdc

It's not as good as you think because your penalty is bigger, it looks lower because some of it will be taken from interest accrued but not yet paid.

But it is better to switch yes. You're losing about 1% (half the rate) and gaining about 3% (the higher rate for most of the next 12 months).

boingy

You've also forgotten to include the interest that your existing ISA would make in the next nine months. That needs subtracting from your "gain".

But it's still an easy win. Of course, Fixed ISA interest rates might continue to rise...

Ocelot

You will currently be receiving 576.60 p.a. (if exactly 31k), and would forgo approximately 10/12 of this (10 months left in the term), which is approximately 480. This, along with an approximate 6 month interest penalty of around 280 totals 760 in lost interest and penalties for the rest of the term.

However, you would receive 31000 * 5.2 = 1612, divided by 10/12, which is 1343, making you 1343-760 better off for the remaining term, ie 583.

This assumes you do it now (beginning of July, not August). 

If interest rates drop before the end of the term, it would be a wise move, as the new rate might not be so high. If rates rise before then, the opportunity cost could diminish this return psychologically. Either way you would be better off.