What difference in % is required to pay to switch savings accounts?

Anon

Dear All

As my savings rate has dropped by .3% in the past month, there are better accounts out there, including easier access. My question is simple, or not, as I cannot fathom it out (Sunday afternoons, eh ).

If I have £10000 in account A, say at 4.8%, what rate of interest do I need to achieve on a new account to make it worthwhile changing. I don't mean the hassle of changing, as most accounts are quite straightforward, but what additional % is required to allow for at minimum 4 working days for the money to go from one account to the other (where I assume it isn't earning interest). Or, when money leaves your account, does it arrive instantly and start earning interest immediately (though takes 4 days to clear)? And as everything is electronic and in an instant, why does it take 4 working days ... (or indeed, does interest get added on a non-working day?). And finally, what is the best day to start the transfer to minimise loss of interest, if the day matters.

Sorry if this is a daft question, but just thinking out loud.

Many thanks

Anon

mary

Can't do your sums for you - no doubt others can. However, rule of thumb move any money out on a Monday to reduce the days in transit. Don't go over a weekend.

Milarky

Anon wrote:

when money leaves your account, does it arrive instantly and start earning interest immediately?

A: No. Except where it is transferred internally between accounts with the same bank.

..does interest get added on a non-working day?

A:Not while in-transit between accounts, but once in the account interest is paid on money on a 7 days-a-week basis

what is the best day to start the transfer to minimise loss of interest, if the day matters?

A: On a Monday (provided it is not a bank holiday) or on a Tuesday or a Wednesday but definitely NOT on a Thursday or a Friday. Allowing two 'clear' working days after the date of electronic payment in other words.

It is planned that electronic BACS payments will go through in one day [arriving the same day if sent before noon, as I understand] some time by the end of 2006. Once this happens, you will be able to arrange to move money between different banks' account with no lost days' interest. However, the speeding up of cheque settlements has been delayed even further, so that the best way for anyone to 'protect' themselves in the current [and near future] environment is to always avoid cheques if possible. The typical bank does not pay interest on a cheque for three working days after receipt. In practice, you must pay in a cheque on a Monday or Tuesday [not a Wednesday, Thurday or Friday] to avoid this 'clearing' period taking in the weekend - otherwise you won't get any interest for at least the first five days. BACS payments going into your account are different, however, in that they earn interest from the date of 'arrival' (as described above)

Going back to your opening remarks about the amount of lost interest, the way I look at this is to ask: "How may days does the loss of interest take to make up after transfer?".

Example: Account A pays 4.6%, account B pays 5.0%. Number of days is 2 (eg Mon to Wed: minimum) Time to make up lost interest will therefore be:

2 days x 4.6% /(5.0% -4.6%) = 9.2 'days%' / 0.4% = 23 days

i.e you lose 4.6% for 2 days and you then make this back up at the rate of 0.4% 'per day', which will take 23 days at the higher to achieve, and after this time you are 'better off' than before.

(HTH)

masonic

Well, with most accounts, you would have to first transfer to your current account, then to your new savings account. That would make 8 working days (10 days inc. weekend minimum). 10 days interest at 4.8% would be need to be matched by an increase of 0.13% to break even assuming you earned interest at your new rate for a year. The trouble is, rates can change and you might want to move your money again, so there is no magic calculation you can do.

Milarky

masonic wrote:

Well, with most accounts, you would have to first transfer to your current account, then to your new savings account. That would make 8 working days (10 days inc. weekend minimum). 10 days interest at 4.8% would be need to be matched by an increase of 0.13% to break even assuming you earned interest at your new rate for a year. The trouble is, rates can change and you might want to move your money again, so there is no magic calculation you can do.

It depends on whether the transfer really takes that time or not. If the account is opened by BACS under the accountholder's control then they ought to lose no more than 2 days if they time it right. If the account is opened with a 'bankers draft' they will certainly lose three 'clearing' days interest even if they present the day of withdrawal. If they use a personal cheque, and their overdraft limit covers it, they might lose only one day (assuming the cheque is presented after two days and they move money instantly from their savings into their current account to cover this?)

Robert_Sterling_3

ANSWER to original question

Assume rate you are getting is x% per annum

You lose a few days interest.

Each day lost is 1/365 of a year

1/365 of x% is lost

Example

Original rate 5%

Interest lost for 4 days.
Fraction of the 5% which is lost is 4/365 i.e. in the region 0f .01% of the 5%

So you get 4.99% not 5% for one year

In a nut shell the loss of interest is negligable.

masonic

Milarky wrote:

It depends on whether the transfer really takes that time or not. If the account is opened by BACS under the accountholder's control then they ought to lose no more than 2 days if they time it right. If the account is opened with a 'bankers draft' they will certainly lose three 'clearing' days interest even if they present the day of withdrawal. If they use a personal cheque, and their overdraft limit covers it, they might lose only one day (assuming the cheque is presented after two days and they move money instantly from their savings into their current account to cover this?)

You have a point there. I didn't consider staggering two-stage transfers either - mainly because I would never be brave enough to do such a thing, especially after my foray into the unpredictable world of ICICI! I've come across a couple of savings accounts where a transfer out by direct debit results in your account being debited on day 1 (hence initial 4 days lost interest), but guess that's the maximum you would HAVE to lose. Anyway, even with my very generous transfer time, it wouldn't take a very big difference in rate to make a transfer worthwile.

cloud_dog

Why don't you just open a new account with £1 (or minimum payment) then either make the lump sum payment by electronic payment or even (perhaps) cash.

grumbler

Anon wrote:

...what rate of interest do I need to achieve on a new account to make it worthwhile changing. ...

I think you can find an irrefragable answer to your question in Dagobert's posts in Stay with A & L or Move To Cahoot !! thread ...

miller

Robert_Sterling wrote:

Original rate 5%

Interest lost for 4 days.
Fraction of the 5% which is lost is 4/365 i.e. in the region 0f .01% of the 5%

So you get 4.99% not 5% for one year

In a nut shell the loss of interest is negligable.

4/365 ~= 1%
1% x 5% = 4.95%.

So on £100 you would lose 5p - still negligible ;-).

One thing that hasn't been mentioned in this thread and other threads is closure interest. Say that £100 had been in for 6 months @ 5% the closure interest credited would be £2.50. Assume you are moving to another account at 5% (!) you would then earn some extra interest on the £2.50 -- roughly equivalent to what had been lost in this example (assuming interest credited annually i.e. 5% AER/gross).

Dagobert

Robert_Sterling wrote:

Example

Original rate 5%

Interest lost for 4 days.
Fraction of the 5% which is lost is 4/365 i.e. in the region 0f .01% of the 5%

You're introducing a not insignificant rounding error:
1 day costs 5/365 = 0.0137
4 days cost 4*(5/365) = 0.055

Robert_Sterling wrote:

So you get 4.99% not 5% for one year

Hence losing 4 days is equaivalent to 4.95%

Robert_Sterling wrote:

In a nut shell the loss of interest is negligable.

For £10,000, a 4-day transfer costs £5, for £100,000, a 4-day transfer costs £50, which is not exactly insignificant.

Also, it doesn't answer the OP's question for which percentage difference it would be worth it changing banks. In fact, for a fairly small percentage difference, the move might even result in a loss:

Example:
old account: 4.85%
new account: 5.00%
It would take 129 days to recoup the cost of transfer as per the formula given in the Stay with A & L or Move To Cahoot !! thread. If he withdraws the money before the break-even point of 129 days, he will have made a loss.