Why isn't AER/Gross rate the same as the advertised percentage rate on my savings account?

EasyToAssemble01
EasyToAssemble01 Posts: 119 Forumite
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edited 29 February at 6:51PM in Savings & investments
Sorry if this is a basic question, but I'm just trying to get my head around the rates on my savings account. The advertised rate is 7% (AER / Gross) with the yearly maximum deposit being £3,600. I would assume that £3,600 + 7% = £252 interest. But, the bank's literature suggests it would be only £136.50 after 12 months.

What am I missing here? What would explain the discrepancy between those two figures. Is it because the later payments haven't matured as much as the earlier ones?

Sorry if this sounds like a silly question, but I can't seem to find anything that explains the concept of savings rates properly.

Comments

  • mebu60
    mebu60 Posts: 897 Forumite
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    I am assuming this is a monthly regular saver. The first deposit gets 12 months at 7%, the second 11 months, .... .... .... ...., the last gets 1 month at 7%.
  • eskbanker
    eskbanker Posts: 30,959 Forumite
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    Sorry if this sounds like a silly question, but I can't seem to find anything that explains the concept of savings rates properly.
    https://www.moneysavingexpert.com/savings/best-regular-savings-accounts/#accordion-content-0230858920-4 has an explanation of interest on regular savers, where the balance is accumulated over the term....
  • Ed-1
    Ed-1 Posts: 3,890 Forumite
    First Anniversary Name Dropper First Post
    Sorry if this is a basic question, but I'm just trying to get my head around the rates on my savings account. The advertised rate is 7% (AER / Gross) with the yearly maximum deposit being £3,600. I would assume that £3,600 + 7% = £252 interest. But, the bank's literature suggests it would be only £136.50 after 12 months.

    What am I missing here? What would explain the discrepancy between those two figures. Is it because the later payments haven't matured as much as the earlier ones?

    Sorry if this sounds like a silly question, but I can't seem to find anything that explains the concept of savings rates properly.
    Interest is accrued daily. So at the end of the each day during the year, the balance accrues interest at 0.07/365. As the balance each month is different, later months accrue more interest each day than earlier months.
  • Thanks for all the replies. This makes sense now.
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