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Santander Isa Interest Query

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I changed my ISA from ing to Santander in April due to the pathetic interest rate. Santander lured me with their 2.85% rate so I swapped.

With ING the interest was payed monthly calculated daily so each month I could see my money growing (well shrinking in real terms!) with Santander the interest is paid yearly so I have had the same balance sitting there since April. What I'm wondering is this; is the interest on Santander compounded like ING or is it just calculated and paid once a year?

I think I'll move back to ING next year either way as they will probably have a good deal for new customers by then. Also I like their website so much better to manage your online accounts than Santander.

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I changed my ISA from ing to Santander in April due to the pathetic interest rate. Santander lured me with their 2.85% rate so I swapped.

With ING the interest was payed monthly calculated daily so each month I could see my money growing (well shrinking in real terms!) with Santander the interest is paid yearly so I have had the same balance sitting there since April. What I'm wondering is this; is the interest on Santander compounded like ING or is it just calculated and paid once a year?

I think I'll move back to ING next year either way as they will probably have a good deal for new customers by then. Also I like their website so much better to manage your online accounts than Santander.

The AER (annual equivalent rate) I think shows the equivalent rate received if the money was kept in the account for a full year and compounded after each interest payment period, and was designed to allow people to compare rates even if they have different interest payment terms. If they have the same AER, you will receive the same amount over the year.

The gross rate shows the actual rate paid over the particular interest payment period (without compounding), so a monthly interest account would have a slightly lower gross rate than a yearly interest account with the same AER.

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OP, you WILL be moving your ISA in a years time. Santander's ISA drops to a pathetic 0.5% interest after the introductory bonus goes. I'm in the process of moving mine from Santander to First Direct.

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Make sure you know what the interest should be - never trust them. In the past fews months I have had to complain to Tesco, Sainsburys and Nat West about under payment of interest and in all cases they agreed I was right and then paid up. I suspect there are lots of people who never check, just assuming interest rates are low at the moment. It's amazing how the interest payment is always BELOW what it should be.

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Make sure you know what the interest should be - never trust them. In the past fews months I have had to complain to Tesco, Sainsburys and Nat West about under payment of interest and in all cases they agreed I was right and then paid up. I suspect there are lots of people who never check, just assuming interest rates are low at the moment. It's amazing how the interest payment is always BELOW what it should be.

I got the interest on my Santander ISA today and it was exactly as expected.

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The AER (annual equivalent rate) I think shows the equivalent rate received if the money was kept in the account for a full year and compounded after each interest payment period, and was designed to allow people to compare rates even if they have different interest payment terms. If they have the same AER, you will receive the same amount over the year.

The gross rate shows the actual rate paid over the particular interest payment period (without compounding), so a monthly interest account would have a slightly lower gross rate than a yearly interest account with the same AER.

Great thanks for that. Ill look at AERs in future.

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OP, you WILL be moving your ISA in a years time. Santander's ISA drops to a pathetic 0.5% interest after the introductory bonus goes. I'm in the process of moving mine from Santander to First Direct.

Yes I will be moving it whatever. I'll wait until the end of the tax year and see what the best available ISA is then.

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Great thanks for that. Ill look at AERs in future.

AERs are good because, however interest is paid, it allows quick and direct comparison between products, but it might be useful to understand the relationship between monthly interest and yearly interest.

The way that some institutions report monthly interest rates seems a bit confusing to me -- they often seem to multiply a monthly interest rate by 12 just to give you a vague idea what the interest rate is, but, because of compounding, the per-annum rate isn't just a twelfth of the monthly rate, so I think it's next to useless, and probably more confusing.

As an example, check out this Barclays page. It's a monthly savings account with an AER of 3.25%, and a quoted monthly rate of 3.2%. The monthly rate is definitely not 3.2% -- because if you really got 3.2% every month, the AER would be:

1.032 ^ 12 = 1.459 or nearly 46%!

Instead, the amount of interest paid each month is:

0.032 / 12 = 0.00267 or 0.267% (a little more than a quarter of a percent) per month.

The 3.25% AER quoted there could be calculated from the actual monthly interest rate like this:

1.00267 ^ 12 = 1.0325 or 3.25%

So, to my mind the monthly rate should be quoted as 0.267% rather than 3.2% because multiplying 0.267% by 12 doesn't really say what the monthly rate is, nor does it agree with the AER -- and may lead people to believe that they're actually getting less interest if they accept a monthly interest payment rather than an annual one (which is a choice that people are asked to make when signing up to some products).

Edited by Ologhai Jones

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