Is a 6 month term better than 12 because of compound interest?

F

François

Registered User
Messages
37
I was looking at the Halifax fixed rate account of 5.05% for six months and 5.60% for twelve months. [broken link removed]

Hopefully this doesn't sound too confusing. If you had €100,000 to invest, would it make more sense to invest it for six months at 5.05% because you would have access to the interest after six months meaning you could reinvest the entire amount and start gaining interest on the interest already earned. Rather than wait twelve months for the interest of 5.60% to be applied to the account before you could reinvest it and gain interest on the interest.
 
No.

Look at the Annual Equivalent Rate column. That's a way of comparing the compounding effect of the gross interest rates for different term products.

A.E.R is the effective interest rate you'd get over 1 year if you put the money away for 6 months and then immediately reinvested it and the interest you got for another 6 months. This assumes that the interest rate offered for the second 6 month period is the same as the first.

Choose the higher A.E.R. and longer term in an environment such as the present one where interest rates are highly likely to come down further.
 
Bear in mind that your €100,000 would not all be covered in the event of Halifax going bust. They are covered by the UK deposit protection which I think is a max. of £50,000.
 
Are you sure? According to itsyourmoney.ie Halifax is covered by the irish protection scheme i.e. up to €100,000.
 
iggy said:
[broken link removed]
Click to expand...

That article refers to the government's unlimited guarantee scheme.
My understanding is that they are covered by the E100,000 government guarantee, but not the unlimited one, as per the itsyourmoney.ie website.
 
Thanks for clearing that up Raven. i`m getting so confused with all the changes lately, just like the `08 car tax change.....maybe I`m just gettin` too old for all this deposit rate chasin` stuff!!
 
There's no guarantee at what rate you could invest the € 100,000 + interest earned in 6 month's time. It could be higher or lower than the current rate. The 12 month rate locks in the rate for the whole year, but again this could be a good deal or a bad deal.

The Halifax rates are implying that they think the 6 month rates will be higher in 6 months than they are now or else that they are paying a premium for 12 month deposits.
 
You must log in or register to reply here.
Back
Top