I'll soon be 16 and I'm comparing a few high interest savings / current accounts and this one from Santander UK looks too good to be true, so I think I'm not understanding it right.

Santander 1-2-3 current account says that I get Monthly interest of 1.50% AER / 1.49% gross (variable) payable on your entire balance up to £20,000.

Monthly interest of 1.5%? Does that mean, if I have £10K in the account, I get £150 each month? that is way too much compared to the other banks so I'm wondering what I'm missing.

  • In addition to the answers below, note that the account has a £5/month maintenance fee, which will cut into what you earn, and has a couple of other requirements, which if you don't meet will probably drop the interest rate, possibly a lot. – blm Jul 17 '18 at 20:49

"AER" means "Annual Equivalent Rate". This means that if you put in £100 on January 1st, it will pay you some amount of interest each month (roughly 1/12th of 1.5%, but actually more like 1/12th of 1.49%), so that by the end of the year, your total amount of interest earned will be exactly £1.50.

With £10k invested, you will have £150 of interest earned by the end of the year.

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    The exact value is 1.015^(1/12) - 1. – MooseBoys Jul 12 '18 at 21:27
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    @DavidSchwartz AER and APR are essentially the same but with the crediting direction swapped. The expression in my previous comment yields 0.12415%, or 1/12 of 1.4898%, which is essentially what Grade's answer states. I was just adding an explanation for where the "1.49%" came from. – MooseBoys Jul 13 '18 at 1:14
  • @MooseBoys Yes thanks - for reference for those wondering about the difference, this is because the interest earned in month 1 also earns interest itself (it 'compounds'), and so on for each future month, so if the actual calculation was 1.5%/12 each month, then total interest earned over the period would be more like 1.6%. – Grade 'Eh' Bacon Jul 13 '18 at 17:25

You aren't reading it correctly - the AER stands for Annualized equivalent rate meaning that it is the equivalent rate that you would get for keeping the money in for an entire year and getting only one interest payment. The interest is likely calculated daily and paid monthly at an equivalent rate of 1.5% per year. The monthly rate will be (1 + .015) ^(1/12) - 1 = 0.001241, which is 0.1241%

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    Actually, that's not quite right either, because it ignores the effect of compounding. It's the monthly rate that when compounded twelve times yields a 1.5% total increase, or 1.015 ^(1/12) -1 = 0.001241... or 0.1241...% – Monty Harder Jul 12 '18 at 17:09
  • Monty is correct. Your last sentence is wrong. A monthly rate of 0.125% would result in an AER of greater than 1.5%. – David Schwartz Jul 13 '18 at 0:57
  • I've gone ahead and submitted a correction to the final sentence, but it has to be peer reviewed. Other than that this is exactly correct. – Monty Harder Jul 13 '18 at 4:05

It is too good to be true.

In your link it says:

"Monthly interest of 1.50% AER / 1.49% gross (variable) on balances up to £20,000"

Click on the AER link and it brings up:

AER stands for ANNUAL Equivalent Rate. It is the official rate for savings accounts, and is designed to allow easy comparisons between different savings accounts. It shows what interest you can get over a year.

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  • This is the best answer. It explains why it is important to use annualized rates. Apples to apples, not oranges. +1. – MPW Jul 12 '18 at 21:09

Other answers have hinted at this, but it might not be obvious if you're not familiar with these things: the reason the rate is quoted as an AER not a monthly figure is due to compound interest.

Imagine the account did pay 1.5% per month. In the first month, it would pay £150 on your £10k, as you say; but in the second month, you would now have £10,150, so it would pay £152.25; on the third month, it would pay slightly more again, and so on.

This makes comparing accounts which pay out at different intervals difficult, because you can't just multiply the monthly figure by 12 to get the amount you'll earn over a year.

The AER is the "Annual Equivalent Rate", and represents the amount you will earn, including compound interest, if you leave money in for a year. So a 1.5% AER means either that the account pays exactly that amount at the end of the year, or it pays an equivalent amount spread throughout the year. However often it compounds, leaving £10000 in a 1.5% AER account for a year will gain you £150.

As others have said, the actual rate calculated each month will be slightly below one-twelth of 1.5% - the bank has calculated the rate to give an easy-to-read AER.

Another way to put it is that you will get on average £150 / 12 = £12.50 per month over the first year. The first month you will get less than that, and each month you'll get slightly more than the last because your balance will be slightly higher.

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