Kent Reliance Strange Interest Calculation

1spiral

Last month my monthly easy access interest account had a balance of 44K for 1 day at 4.99% monthly gross.

By my estimation this should have resulted in around £6 interest credited at the end of the month.

What I received was just over £3.

On querying this with them they replied it was correct and went on to explain their method of calculation. Now I must admit this took me several hours to get my head round because it just seems so cumbersome but I have tried to explain it below.

Their method of calculation is that their year runs from 1/10 to 30/9.

All deposits/withdrawals are calculated as to their effect up until the end of their year so a 10000 deposit on 28/2 would accrue 216 days interest at 4.99% = £295.29. This would then be banked into their “interest bank”.

A withdrawal of 5000 on 10/3 would lose 206 days interest = £140.81. This would then also be banked.

The interest bank now stands at 295.29-140.81 = £154.48

This is where it seems strange. Because my interest is paid monthly, to calculate the amount to pay they take my balance on date due (in this example 10000 initial deposit -5000 withdrawal) = 5000 remaining at end of month. They calculate the interest on this in months, not days so for March this equates to 6 months out of 12 and calculate the interest as 5000 x .0499 x 6/12 = £124.75. This is the amount that needs to remain in the interest bank.

They then subtract this from the interest bank and pay me the difference i.e 154.48-124.75= £29.73

The interest bank now stands at 124.75 when the process restarts next month.

In my example I would normally expect interest to be calculated as 10 days @4.99% on 10000 and 21 days on 5000 = 13.67+14.35 = £28.02 which seems so much easier. Are there any other companies that either use this method or have strange methods of calculation?

Having digested the figures several times over, I’m pretty sure it all balances out in the end, it just seems such an awkward way to get there.

On-the-coast

That’s far too complicated…
just calculate the daily interest rate (working backwards from the compounded gross annual rate) and use that. 

Be aware that very short periods around 1 day might have the own rules on opening / closing balance time of day. 

Also I guess you mean 5% annual gross not monthly?
or maybe the bank just mean it’s 5% compounded monthly so a little over 5% gross annually. 

dcs34

Monthly interest usually just means that you're being paid interest into the account each month. It'll still usually quote an annual interest rate figure (e.g. AER or APR). So the "5%" on say £44,000 earns (5 / 365)% of interest each day.

Plus as said above different banks and building societies will have different rules about how they calculate interest for balances that change during the day - some might take an average balance each hour; others might just use the balance at midnight or some other arbitrary datum point...

EthicsGradient

It looks like this has been designed to given even monthly payments if you have a constant amount in the account, even when months have different numbers of days in them. So in months with 31 days, you'll get a bit less than actually using 31 days in the calculation, while in 30 day months, and especially February, you'll get more.

There's something to be said for that predictability, and it makes it easy to understand when it's a bond which will have the same balance month after month. It does seem surprising for an instant access account, which most people would be added to or withdrawing from often enough that they wouldn't expect a constant monthly interest figure. Maybe they set their system up with bonds in mind, and didn't want to do the work of a different calculation methos for instant access.

1spiral

On-the-coast said:

That’s far too complicated…
just calculate the daily interest rate (working backwards from the compounded gross annual rate) and use that. 

That is what I do and is what flagged this anomaly to me thus seeking clarification from Kent.

EthicsGradient

Having said what I did above, I tried to do a spreadsheet calculation to see how the £6->£3 happened, and I still can 't work it out. I suppose the implication is that the difference that you haven't received at the end of April (ie another £3) will be spread out over the May to September payments, ie about 60p each time. But the calculation method you described in the OP should still have given you roughly £6 in April, it seems to me.

Perhaps the basis of the calculation is "if the balance were to stay the same until 30th Sept, then work out what the total interest for the year would be, subtract what we've already paid, and then divide the remainder by the number of months remaining". eg "the predicted interest for the year would have been the £6 from the £44k, and £12 from the other balance you've had/will have until 30th Sept, and there will be 6 monthly payments from end of April to end of September inclusive, so pay £3 each month".

1spiral

EthicsGradient said:

Having said what I did above, I tried to do a spreadsheet calculation to see how the £6->£3 happened, and I still can 't work it out. I suppose the implication is that the difference that you haven't received at the end of April (ie another £3) will be spread out over the May to September payments, ie about 60p each time. But the calculation method you described in the OP should still have given you roughly £6 in April, it seems to me.

I suspect that the reality of the matter is that I was given too much in March. In my random example that I gave using a deposit of 10K at end of Feb and a 5K withdrawal in March, the figure calculated works out to more than you would expect. I didn't know this when choosing those dates/amounts at random. My real life example of the £6 v £3 will have been influenced by the deposits/withdrawals of the previous month so will I assume have resulted in me receiving too much in that month. 

EthicsGradient said:

Perhaps the basis of the calculation is "if the balance were to stay the same until 30th Sept, then work out what the total interest for the year would be, subtract what we've already paid, and then divide the remainder by the number of months remaining". eg "the predicted interest for the year would have been the £6 from the £44k, and £12 from the other balance you've had/will have until 30th Sept, and there will be 6 monthly payments from end of April to end of September inclusive, so pay £3 each month".

The problem is the account now only has £1 in and is due 0 interest for the rest of the year according to the statement produced by Kent.

1spiral

I have reconciled my interest for the duration of the account and can confirm that the interest paid from Jan to April tally's with the daily accrual method with a 4p discrepancy which is probably down to rounding errors.

On a monthly basis I received less than expected in Jan and March and more than expected in Feb.

Presumably this is because the months with greater than average number of days (365/12= 30.42) will be short by 0.58 days interest and those with less than average will get additional interest credit.

One thing did cross my mind with my real life scenario and that was that had I withdrawn the funds the day before, as of end of March I would have been overpaid interest due by £3. As no further interest would then have been due on the account, Kent would not have been able to reclaim it.