Fixed rate ISA interest question

luke00

Hi there. I'm looking at the new 3 year fixed ISA from Virgin at 5.5%..

I have the option to be paid monthly/annually or at maturity. If I get paid the interest monthly or annually back into the same ISA account, will these interest payments then earn the same 5.5% interest or do they not count?

Thanks in advance

refluxer

Yes - whenever interest is actually paid into the account,  it'll also start to earn the stated rate. 

When selecting the monthly interest option, the monthly rate is actually lower (5.37%) but this will equate to 5.50% after a year due to compounding. 

As 5.5% is the stated AER for both annual and monthly interest, then this is the overall rate of return you'll achieve with either option after 1 year, when that interest is paid into the account.

TiVo_Lad

The AER (Annual Equivalent Rate) is 5.5% regardless of whether you take interest monthly or annually. However the interest rate applied will be different. Annual pays 5.5% whereas monthly pays 5.37%, but due to the effect of compounding (interest on interest), the amount of interest you end up with will be effectively the same.

Bigwheels1111

If compounded over 3 years I think its around 5.8%

luke00

Bigwheels1111 said:

If compounded over 3 years I think its around 5.8%

Thanks, this makes sense now. Cheers