Interest is calculated monthly?

easyasonetwothree

Hi everyone,
I've just been looking at Nationwide Flex Direct account T&C's regarding the interest on the balance. It says that interest is calculated on the final day of the month - does that mean if I had the max amount in the account on the final day, I'd get the full amount of interest, even if the other days had less? 
I've only ever seen interest calculated daily so I'm not sure how this works.
Any info welcome!
Thank you

Ballard

That seems very strangely worded but it’s highly unlikely that they’ll pay 30 days interest on an overnight balance. They say that interest is calculated monthly but don’t specify how they calculate it. They could only run the accruals at the end of each month but using each days closing balance.

it still seems weird as they wouldn’t be able to track their p&l during the month. 

AmityNeon

It's poorly worded. They perform the calculation at the end of the final day of the month. That calculation involves adding the daily interest accrued over the course of the month, the sum of which is then paid on the first day of the next month. The calculation is only possible (accurate) when the cut-off time on the final day has passed.

Zanderman

easyasonetwothree said:

Hi everyone,
I've just been looking at Nationwide Flex Direct account T&C's regarding the interest on the balance. It says that interest is calculated on the final day of the month - does that mean if I had the max amount in the account on the final day, I'd get the full amount of interest, even if the other days had less? 
I've only ever seen interest calculated daily so I'm not sure how this works.
Any info welcome!
Thank you

The posts above suggest it's been it's poorly-worded. But I'm not sure it is, really. It simply says "Interest is calculated on the last day of each month".

Seems straightforward to me - the interest, over the month (which will be based on the balances during that month) is totted up at the last day of the month. The monthly 'calculation' is working out each day's interest and and adding it all up.

It doesn't imply at all that interest is calculated on the balance on the last day of the month.

easyasonetwothree

I think there's the suggestion that it's poorly worded because usually it's explained that the interest is calculated daily, then paid monthly or annually. There's no mention of anything being done daily, hence the confusion.

zagfles

Interest is accrued daily (this is pretty much universal so arguably no need to state it) but applied at the end of the month. They should have probably said "applied" rather than calculated. Although with this account there is the issue of interest being conditional on paying in £1000 in the month, so interest "accrued"  before the £1000 pay-in is only potential interest, it won't be paid if the £1000 isn't paid in. So maybe that's why they say "calculated"

AmityNeon

It’s common amongst all providers to state that interest is calculated daily. Even Nationwide do so for their savings accounts, e.g. they state either “we work out your interest daily” or “interest is calculated daily”.

Olinda99

1st of the month - interest is calculated on the balance that day

2nd of the month - interest is calculated on the balance that day

and so on

at the end of the month the total interest is added to your balance

amongst other things this means you do not get true compounding because to get this the interest would have to be added to your balance daily

Veteransaver

Is interest paid monthly on this account then? Assumed it was annually paid?

eskbanker

Veteransaver said:

Is interest paid monthly on this account then? Assumed it was annually paid?

No need to make assumptions when it's clearly documented:

Interest is calculated on the last day of each month and is paid on the first day of the next month.

https://www.nationwide.co.uk/current-accounts/flexdirect/

zagfles

Olinda99 said:

1st of the month - interest is calculated on the balance that day

2nd of the month - interest is calculated on the balance that day

and so on

at the end of the month the total interest is added to your balance

Yes, so you can work out the exact interest you'll get by multiplying the balance by the number of days that balance stayed the same, then dividing the total by 365 and multiplying by the nominal rate 4.89% (if in the introductory period). But account for the max £1500 as interest not paid on higher balances. Seems to use end of day balances so for any day count the balance after transactions that day.

So for instance in January if the balance at the start of the month was £600, you paid in £1000 on the 15th (so new balance £1600) and withdrew £500 on the 24th (so new balance £1100), then the interest you earned for Jan was:

(600*14+1500*9+1100*8)*0.0489/365 = £4.11

They still seem to use 365 this year even though it's a leap year. But only makes around 1p difference.

 

amongst other things this means you do not get true compounding because to get this the interest would have to be added to your balance daily

Interest only ever compounds when it's paid, if it were paid daily then for the same AER the nominal rate would be lower. The nominal rate is already lower than the 5% AER because AER is based on annual compounding and the Flex Direct compounds monthly, if it compounded daily the nominal rate would be even lower.