Compound Interest on Reg Saver

AmityNeon

lindabea said:

surreysaver said:

What's a FV calc?

When my First Direct Regular Saver matured in December I got £135.95 in interest.

Where's the compounding coming from if it only pays interest once?

FV is a formula used in a spreadsheet to calculate the future value based on an amount paid over a period of time.

The FV formula is not suitable for regular savings accounts where interest is not applied at the same frequency as deposits.

lindabea said:

Looks like there is no compounding, interest is based on the balance at the end of each month

As a matter of interest, do you have any idea why you did not receive the full 136.50. I'm assuming of course, that you paid 300 in every month.

£136.50 is just an approximation that uses monthly interest of (7% / 12) applied to twelve equal periods, with each period containing a static balance of an additional maximum monthly deposit; this obviously cannot happen in practice as there are varying numbers of days each consecutive month in an annual period. On top of this, the FV formula applies monthly compounding to this approximation, resulting in £139.46.

As you already understand, interest is calculated on the daily account balance, and this consequently requires a daily interest rate of (7% / 365). As no interest is credited to the account during the term, and the account does not calculate interest on pending accrued interest either, there is no compounding involved.

The varying number of days in each month leads to fluctuations in monthly interest earned. Considering the daily interest earned on a single monthly deposit, an account opened on 1st February will generate 28 chunks of interest in the first month. March will generate 62 chunks (31 days × 2 monthly deposits), April will generate 90, and so on until the end of January, for a total of 2,389 chunks of interest, which is the theoretical maximum for accounts that operate based on account months (instead of calendar months). Accounts opened in March can only reach 2,360 — the lowest maximum.

First Direct in particular also has practical restrictions imposed by Standing Order limitations, which are only processed on working days, reducing the maximum number of possible chunks. (That being said, the first account month for HSBC/First Direct regular savers always has 28 days regardless of when accounts are opened, so internally their implementations operate on the 2,389-maximum basis, even if their SO requirements hamper that.)

300 × (7% / 365) × 2,389 = £137.45
300 × (7% / 365) × 2,360 = £135.78
Subtract one chunk for each day missed (e.g. SO date was a Sunday).

fergie_

Good discussion

Should I point out that 2024 was a Leap Year?

AmityNeon

fergie_ said:

Good discussion

Should I point out that 2024 was a Leap Year?

The annual term for this account (and HSBC's) is always 365 days regardless of leap years.

lindabea

A big Thank you to all who have contributed their comments to this thread.  It's been very interesting reading all the replies. I learnt a great deal from them.   

lindabea

AmityNeon said:

fergie_ said:

Good discussion

Should I point out that 2024 was a Leap Year?

The annual term for this account (and HSBC's) is always 365 days regardless of leap years.

This is a very interesting point.  I have been giving it some thought, and what it boils down to, is that for a saver who opened an account before 28 Feb 2024, their account would have to be closed (ie considered Matured) one day earlier than the 'TRUE' maturity date if the interest of 7% can only applied for a max of 365 days..  For accounts opened after 29 FEB, this would not apply as the maturity date will fall after 365 days by default.

So, taking this into consideration, and the fact that a saver can loose 1 or 2 days worth of interest due to the standing order potentially falling on a weekend (there could  be 2-3 months when this could happen and possibly more if it also falls on bank holidays), the £136.50 that First Direct claim you could earn from this account, is never going to be achievable.

I know that it only amounts to a few pence difference, but nevertheless I find it very misleading.  However, it is interesting to note as one poster has said, that when complaining to First Direct about the shortfall, they have made up the difference. Now whether this is due to a gesture of goodwill or to avoid opening up a can of worms if someone escalates the complaint is open to interpretation..          

masonic

lindabea said:

AmityNeon said:

fergie_ said:

Good discussion

Should I point out that 2024 was a Leap Year?

The annual term for this account (and HSBC's) is always 365 days regardless of leap years.

This is a very interesting point.  I have been giving it some thought, and what it boils down to, is that for a saver who opened an account before 28 Feb 2024, their account would have to be closed (ie considered Matured) one day earlier than the 'TRUE' maturity date if the interest of 7% can only applied for a max of 365 days..  For accounts opened after 29 FEB, this would not apply as the maturity date will fall after 365 days by default.
So, taking this into consideration, and the fact that a saver can loose 1 or 2 days worth of interest due to the standing order potentially falling on a weekend (there could  be 2-3 months when this could happen and possibly more if it also falls on bank holidays), the £136.50 that First Direct claim you could earn from this account, is never going to be achievable.
I know that it only amounts to a few pence difference, but nevertheless I find it very misleading.  However, it is interesting to note as one poster has said, that when complaining to First Direct about the shortfall, they have made up the difference. Now whether this is due to a gesture of goodwill or to avoid opening up a can of worms if someone escalates the complaint is open to interpretation..          

My last one spanned the 29th Feb and my actual was £135.49. The £136.50 is presented as an example based on some assumptions. If I phoned them, then it would be cheaper for the business to credit me £1.01 than compose a detailed explanation of why my outcome was different. Likewise, the path of least resistance for me was to do nothing, as I didn't consider it worth £1.01 to phone them and enter into a dialogue where I pretended I felt short-changed.

TBH, I don't know why they don't just work out the worst case scenario based on where weekends and bank holidays fall, then quote that, then everyone will feel lucky.

lindabea

Masonic - Thank you for your comment.  I totally agree with everything you said.  I think it would be far better in situations like this, for banks to quote the worst case scenario than make attractive headline quotes simply to attract customers.  Especially as in this case, when they are fully aware that the headline amount they quote can never be achieved by any saver due to restrictions imposed by the bank itself.

LIke you, I prefer to see the worst case scenario, and then feel pleased that the actual amount paid is higher then the anticipated amount.  This would no doubt promote credibility in the bank.  The other way round, it would leave savers feeling very let down and possibly wondering if they been mislead leading to a loss of confidence in the bank.         .  

AmityNeon

lindabea said:

I think it would be far better in situations like this, for banks to quote the worst case scenario than make attractive headline quotes simply to attract customers. Especially as in this case, when they are fully aware that the headline amount they quote can never be achieved by any saver due to restrictions imposed by the bank itself.

For how they expect the account to operate according to T&Cs, £136.50 or higher is achievable, but it’s on the upper end of the spectrum. For accounts opened in February, the theoretical maximum interest at 7% is £137.45, and a day’s interest on £300 is approximately 5.75p, so there’s a 16-day buffer for deposit delays.

lindabea said:

I prefer to see the worst case scenario, and then feel pleased that the actual amount paid is higher then the anticipated amount. This would no doubt promote credibility in the bank. The other way round, it would leave savers feeling very let down and possibly wondering if they been mislead leading to a loss of confidence in the bank.

Their estimated interest illustration likely follows an industry standard commonly seen in Summary Boxes from all providers, and it's perhaps too onerous to have illustrations accurately tailored for every single product. In rare cases providers still get it wrong, most recently YBS if I recall, where the product term had a fixed maturity date of 31st October, so they were forced to tailor the illustration (more) accurately to the non-standard term length of ~9.5 months (assuming accounts were opened on the same day the product was released), but failed in their initial attempt to do so.

I think it would be more realistic for First Direct (and HSBC) to just drop the archaic and arbitrary deposit restrictions, especially because they have other underlying systems already in place restricting headline interest to account months only.

fergie_

In some ways the question now is:

Is there an optimum day of the week or date in a particular month that it is most advantageous to open a RS? (not with standing some people may wish to receive interest before or after the 6th of April).

surreysaver

There would be, but it would change every month depending upon bank holidays, so you would have to sit down an work it out