monthly vs annual interest

misscatt

I plan to populate 4 accounts with approx 80,000 (not over 85) having just sold my property.
I plan to use easy access accounts as I am buying a house with the funds once I buy one.
My question is:
some accounts offer annual interest which is slightly higher than that offered monthly
but what would be the difference if I withdrew my money at 6 months? will I get 6 months interest? what about 'maturity'? 
thanks in advance all!

Reed_Richards

misscatt said:

some accounts offer annual interest which is slightly higher than that offered monthly

No it's the same really.  Once money is credited to your account, that money also starts to earn interest.  So what looks like a lower rate for monthly interest works out the same as for annual interest, provided you leave the monthly interest in the account.

misscatt said:

but what would be the difference if I withdrew my money at 6 months? will I get 6 months interest? what about 'maturity'? 
thanks in advance all!

Easy access accounts don't usually have a "maturity" date or a fixed rate of interest, although they may expire after a certain period, like a year.  If you withdraw after 6 months you will get the same 6 month's worth of interest whether you opt to have interest credited monthly or annually.   
  

grumbler

Reed_Richards said:

misscatt said:

but what would be the difference if I withdrew my money at 6 months? will I get 6 months interest? what about 'maturity'? 
thanks in advance all!

  If you withdraw after 6 months you will get the same 6 month's worth of interest whether you opt to have interest credited monthly or annually.   
  

To clarify, if it's annual interest you'll have to close the account to get the interest credited earlier.

AmityNeon

If offered a choice between monthly or annual, the best return would come from choosing annual interest and closing the account(s) in 6 months when you withdraw the funds.

E.g. £80,000 @ 5.00% AER
Annual interest (approx. 6 months): £2,000
Monthly interest (approx. 6 months): £1,975.61

Reed_Richards

AmityNeon said:

If offered a choice between monthly or annual, the best return would come from choosing annual interest and closing the account(s) in 6 months when you withdraw the funds.

E.g. £80,000 @ 5.00% AER
Annual interest (approx. 6 months): £2,000
Monthly interest (approx. 6 months): £1,975.61

This is too good to be true.  If it were true, you could close the account after 6 months, immediately open another account earning 5% interest and deposit the £82000.  Close this after another six months and your £80,000 would have increased to £84050 in a year, despite only earning 5% interest throughout.   

misscatt

AmityNeon said:

If offered a choice between monthly or annual, the best return would come from choosing annual interest and closing the account(s) in 6 months when you withdraw the funds.

E.g. £80,000 @ 5.00% AER
Annual interest (approx. 6 months): £2,000
Monthly interest (approx. 6 months): £1,975.61

Can you clarify why some of the accounts use the term 'maturity'? This makes me think that its some sort of inbuilt fixed rate because you dot get the interest until the maturity date *- which would not be the same as the date I choose to close the account?

Reed_Richards

@misscatt, can you give an example of an easy access account that does this? 

Angelica123

Reed_Richards said:

AmityNeon said:

If offered a choice between monthly or annual, the best return would come from choosing annual interest and closing the account(s) in 6 months when you withdraw the funds.

E.g. £80,000 @ 5.00% AER
Annual interest (approx. 6 months): £2,000
Monthly interest (approx. 6 months): £1,975.61

This is too good to be true.  If it were true, you could close the account after 6 months, immediately open another account earning 5% interest and deposit the £82000.  Close this after another six months and your £80,000 would have increased to £84050 in a year, despite only earning 5% interest throughout.   

I don't believe AmityNeon's working out is correct. You can't just work out the annual interest using AER and divide by 2 to get the interest at 6 months because the AER of 5% assumes that the interest would continue to compound from months 6-12 months. 

If the interest is left in the savings accounts to compound (and not withdrawn monthly as income) - then there shouldn't be a material difference between monthly and annual interest. As the OP will be earning above the personal saving allowance - she may want to consider if it is more convenient for tax purposes for the interest to be paid in this tax year or next tax year. 

Exodi

Reed_Richards said:

AmityNeon said:

If offered a choice between monthly or annual, the best return would come from choosing annual interest and closing the account(s) in 6 months when you withdraw the funds.

E.g. £80,000 @ 5.00% AER
Annual interest (approx. 6 months): £2,000
Monthly interest (approx. 6 months): £1,975.61

This is too good to be true.  If it were true, you could close the account after 6 months, immediately open another account earning 5% interest and deposit the £82000.  Close this after another six months and your £80,000 would have increased to £84050 in a year, despite only earning 5% interest throughout.   

I don't think this is too good to be true and I believe is the case - if you are able to convince the banks to keep closing accounts and pay the interest early.

Plus, if we get down to brass tacks, £84,050 on £80,000 is 5.0625%, I'd say it's a fairly negligible difference compared to 5%, certainly not in the realms of 'too good to be true'.

Even if you took this to the extreme and were able to close annual interest bearing accounts every single month @ 5% AER, you'd achieve  £84,092.95 (5.1162%).

For AER's (Annual Equivalent Rates - I'm sure everyone knows what they stand for, but it's important to remind ourselves) to function, they have to assume the amount is held for a year. This is to benefit the consumer from having to work out relatively difficult compound formulas.

The fact that a consumer can gain a marginal benefit from an account paying interest annually instead of monthly if the AER is the same, is effectively just abusing banks goodwill in paying the annual interest early.

Rollinghome

The clue is in the name.  AER stands for Annual Equivalent Rate, not Six-monthly Equivalent Rate.  If money is in a monthly interest account for less than a year it, will earn less than the stated AER. Money in an account paying annual interest would earn more than the stated AER if it can be closed before one year and the interest received reinvested at the same rate or more.
Anyone who prefers not to do the maths can use an online interest calculator such as https://www.thecalculatorsite.com/finance/calculators/compoundinterestcalculator.php to show them the interest they would receive for any given AER over any period.

Cisco001

Personally always pick monthly if there is a choice.
My though is what if the bank go burst before paying annual interest?
Without reading FCSC details, I just assume they only compensate the money in the account at the time.