Want the best interest rate? Make sure you’re comparing apples with apples
When shopping around for the best interest rate, don’t be fooled by terms such as “market-leading”, “best in SA”, “highest”. Rather do some investigations, find out how interest works and in the end, make sure you’re comparing apples with apples.
These are the terms you need to know:
The Annual Compounding Interest rate is the interest you earn as a depositor if you leave your deposit with the bank for a full year and only draw the interest at the end of that year. If you choose NOT to be paid your interest every year and opt to rather have it paid out on the maturity of the product (for example, after five years), this is called the Expiry rate.
This example might make it easier to understand:
We currently offer a 10.75% rate for a fixed term deposit of 5 years. That is the Annual Compounding rate that you will earn if you decide to have interest paid out each year. The below infographic explains this in detail.
Simply put, if you were to invest R100 000 for 60 months in our Fixed Deposit account on 1 July 2018, the bank would pay you R10 756.50 in interest on 30 June 2019, and again on 30 June 2020, 30 June 2021, and 30 June 2022, and return the principle, together with the 5th year’s interest on 30 June 2023, paying out a total of R110756.50 on that day and R153782.50 in total.
Now, let’s look at the ‘Expiry Rate”. When you choose NOT to have your interest paid out every year, the cumulative effect of the interest not being withdrawn, is that you earn a return at a rate of 13.33%. This is a Simple interest rate.
So to simplify this is what you really need to know:
- Always compare the nominal annual compound interest rates. If you are not sure, phone and ask them or visit your local branch.
- Also remember a Monthly Compounding rate is less than an Annual Compounding rate. It is always better to leave your interest in the bank and let it accumulate for as long as possible to receive the greatest return.
- Invest with a reputable financial institution?
- If possible don't withdraw your interest. Reinvest your interest to get the most money back – to earn interest on interest, i.e. “compound interest”
- Always check if you will pay penalties if you withdraw your deposit early and/or what you can withdraw when.
- Invest for as long a period as possible to receive maximum benefit
- If you want the full impact of compounding you need to ensure you are comparing the same Expiry Rates, also sometimes referred to as maturity rates, for the same tenor of maturities across all banks.
Remember to shop around and make the necessary comparisons. Don’t be afraid to ask questions and make sure you understand what interest you will be earning. You may find at the end of the day you could be comparing apples with oranges, rather compare apples with apples and make an informed decision.