How do I calculate interest?

Legacy_user · 30 September 2004 at 2:19PM

Hi, trying to weigh up my options re paying money off on my mortgage or investing it wisely.

I'm aware of regular savings vehicles, but for simplicity can someone help me with a more basic scenario so I can at least work out a minimum return based on current rates.

I took advantage of the recent Cahoot introductory savings account which currently advertises the interest rate for under 50k as being 5.65% AER/Gross pa (how can it be both AER and Gross??).

On lets say £10k, how much interest would that equate to over a year. Sorry if its a really thick question and its as simple as £565! Just need to understand how it all works. £10k off my mortgage would work out as a reduction of £42 per month.

I don't pay tax by the way.

Thanks for any help anyone can offer. ;D

System · 30 September 2004 at 4:50PM

Thanks cricketer, so it was that simple. :-[

From the cahoot account, as I understand it, I could then transfer £500 per month to Abbey's regular saver to maximise the return.

If that's right I guess it would definitely make the savings more attractive.

ED · 30 September 2004 at 5:51PM

Are you rushing today to an Abbey branch, so you can open the a/c this month? If so, on October 1st next year your a/c will reach its anniversary, & you'll have full access penalty-free to your money. :-)

Delay opening Abbey's Fixed Rate Monthly Saver until tomorrow, & it would cause the anniversary to be delayed a whole month.

Wow, 6.50% gross interest on a yearly average of £3,000 = very approximately £195 gross interest (assuming £500 per month is deposited). Meanwhile, the other £3,000 may earn £169.50 in cahoot. Total gain after a year, about £364.50, minus a smidgen for nil-interest while each Standing Order is in-transit between cahoot & Abbey. (Anyone here experienced how long this takes – eg if it leaves on Monday, does it arrive on Wednesday?)

In contrast, a total of £6,000 left in cahoot (if it remains @ 5.56%) would earn £339 in 1 year. Leaving it here may be some people's preference, just in case lump sum reduction of mortgage becomes a preference during the coming 12 months…

Well done, maridley, for having a property. (Wish I had, instead of savings that are inadequate to again be a home owner…unless prices drop!)

Robert_Sterling_3 · 30 September 2004 at 5:59PM

I took advantage of the recent Cahoot introductory savings account which currently advertises the interest rate for under 50k as being 5.65% AER/Gross pa (how can it be both AER and Gross??).

AER is higher than gross if the interest is paid monthly, or half yearly etc.

E G

If you get £100 at the end of the year then you are getting £100 gross
If you get £50 after 6 months and another £50 after a year then you are still getting £100 gross but you can earn some interest for 6 months on the interest paid to you after six months.
It is this what makes the AER higher than the gross rate.

One more example.

Capital £100 Interest 12% Gross Interest 12%

Capital £100 Interest £1 per month
Total interest i.e. Gross is still £12
But AER is 12.68%

Robert_Sterling_3 · 30 September 2004 at 6:06PM

It is not possible to give an answer in the absence of a full and frank disclosure of you financial situation.

However here is a wild generalisation to be going on with.

The higher your marginal rate of tax e.g. 0%,10%,22%,40%. the stronger the case for reducing your outstanding mortgage unless you are on an introductory offer, or a fixed rate offer that does not allow early repayments.

ED · 30 September 2004 at 6:19PM

Anyone here believe in karma?

With difficulty, in recent weeks I've put aside my personal dissatisfaction with a vital aspect of cahoot. That is, cahoot locked me out of log-in to my redundant-for-3-years basic a/c with them, thereby preventing me from opening the tasty-rated 5.65% IRS a/c (closed to newcomers, Sept. 2nd). Having seen cahoot much praised, in recent weeks in MSE, I wrote fairly about the a/c for those lucky enough to have it.

When I wrote my above post, cahoot were included. Imagine my delight when, coincidentally, I then collected emails – including one from cahoot stating that as a result of my letter of complaint being valid, they are retrospectively opening an Introductory Rate Savings a/c for my house-sale proceeds! Yes! :-)

Robert_Sterling – yes please to a gross interest rate of 12% :-) :-) :-)

Robert_Sterling_3 · 30 September 2004 at 7:09PM

Actually 1% per cent or more per month is what credit card companies charge their less astute customers. :)

ED · 30 September 2004 at 7:26PM

Greedy porkers!

System · 30 September 2004 at 7:30PM

Thanks for all the advice. Can't pay anything today as I haven't got the money yet! I'm just putting all the wheels in motion for when the money comes in.

Given my status as a non taxpayer, I take it that savings will always win over isas? The rates certainly seem higher, but am I overlooking something?

Certainly favour the option of keeping the money in savings rather than paying off on the mortgage as has been suggested. Yes, I would have to pay a redemption penalty as within the first two years (only £24 though) but as I'm off work currently bringing up my young family, I'd rather have the cash available. Once they are at school I'll go back to work and our financial position will be much stronger so want to use the money to improve things for the short term.

ED · 30 September 2004 at 9:48PM

maridley wrote : "Once they are at school I'll go back to work and our financial position will be much stronger"

…especially if, in each remaining tax year, you put £3,000 into a Mini Cash ISA. It's tax-free status will continue for as long as you resist closing the a/c (unless the prevailing government changes rules, if allowed…?)

Abbey's Postal ISA (Cash mini ISA) @ 5.35% is widely considered the most attractive currently on offer. I do notice, however, the leaflet mentions the a/c is "guaranteed to be a minimum of 0.5% above Bank of England Base Rate until 1 April 2005". That's just 6 months away, so no guarantee after that.

Halifax offer ISA Saver Direct (phone-based) @ 5.15% variable rate.

Good luck with your savings explorations.

System · 1 October 2004 at 12:16PM

Sounds excellent in theory Ed, but this money is to tide me over the next 3 or 4 years - don't think there will be any left by the time I go back to work :-/

Many thanks for all the advice everyone ;D

How do I calculate interest?

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