Monthly interest savings accounts

How does a monthly interest savings account work?

A monthly interest savings account is any type of fixed or variable savings account that pays interest on a monthly basis.

The provider pays the interest due on a specified day each month. They may pay it back into your savings account (which means you can earn interest on top of the interest you’ve earned, known as compounding) or you may be able to have it paid into your current account or another account of your choice.

Other savings accounts may pay interest quarterly, yearly, on anniversary or on maturity of a fixed term, for example. Some providers allow you to choose how you have interest paid while others only pay interest in one way.

How does compound interest work?

Compound interest is when you earn interest on the interest you’ve already earned, as well as on your original deposit.

For example, let’s say you deposit a £10,000 lump sum into a monthly interest account paying 5.00% gross interest.

This equates to a return of approximately 0.417% each month (5.00% divided by 12), which means you would earn around £41.70 in interest for the first month.

If this is compounded (paid back into your account), in the second month you would earn 0.417% interest on £10,041.70 (your initial deposit plus the first month’s interest) and so on, meaning you would earn more and more interest each month, helping your savings to grow exponentially.

By contrast, if interest is paid out into your current account, you would continue to earn the same £41.70 each month on your £10,000 deposit.

See more in our guide to compound interest.

How can I calculate monthly interest on savings?

To estimate the amount you could earn in interest each month, divide the annual gross rate by 12. You can then multiply this amount by your balance to see the monthly interest.

If you don’t want to do the maths yourself, there are several online calculators that can help you to see how much interest you could receive on your savings. Bear in mind that any deposits, withdrawals, rate changes and the effect of compounding will affect the interest you earn.

What savings accounts pay monthly interest?

Monthly interest is available on a wide range of savings options, including easy access accounts, notice accounts and fixed rate bonds, though this isn’t guaranteed. You’ll also find Individual Savings Accounts (ISAs) that can pay interest monthly.

You can view all the savings accounts that can pay interest monthly on our chart above.

Are monthly interest accounts worth it?

Monthly interest accounts may be worth considering if:

• they offer competitive interest rates
• you want the interest earned on your savings to supplement your regular income
• you want to see the tangible benefits of saving, without waiting for a year or more before receiving an interest payment
• you put your money in a fixed bond and want to be able to access the interest earned before the end of the fixed term.

However, keep in mind that if you withdraw interest each month, you’ll miss out on the effects of compounding, which could see you earn less than if you left the interest payments in the account.

Monthly vs annual interest

The only difference between monthly and annual interest savings accounts is the frequency with which interest is paid. The former pays interest each month while the latter pays it once a year.

When looking at monthly interest savings accounts, you may notice that the gross rate is slightly lower than the AER. This is because the AER assumes that interest is compounded (paid back into the savings account), whereas the gross interest rate does not.

By contrast, on savings accounts that pay interest yearly, the gross rate will be the same as the AER.

The AER helps you to compare accounts that pay interest in different ways on a like-for-like basis.

Is it better to have interest paid monthly or annually?

It’s not necessarily better to have interest paid monthly or annually as both options offer different benefits. How you choose to have interest paid is up to you and your individual requirements.

If you want to withdraw the interest paid on your savings at regular intervals, it is likely to be better to have interest paid monthly. But bear in mind you would earn less interest overall than if it was paid back into the account or if interest was paid yearly.

However, if you choose to have interest paid back into your savings account, it shouldn’t make much difference whether the provider pays interest monthly or annually as both options pay interest on top of the interest you’ve already earned.

How to choose the best monthly interest account

Once you’ve decided that you want your savings interest paid monthly, there are a number of other factors to consider to help you choose the right account for you, including:

• The interest rate. This is a key factor as it ultimately decides how much you’ll earn on your deposit. It’s therefore worth keeping an eye on the latest rates to ensure you see competitive returns.
• How often you need to access your cash. If you plan to regularly dip into your pot, easy access accounts typically permit unlimited contributions and withdrawals.
• How long you plan to save for. If you have longer-term savings goals, you could consider a fixed bond to lock in rates.
• What is required to open the account. While some accounts can be opened from as little as £1, others could require upwards of £10,000. It’s also worth considering the method in which the account can be opened. If you prefer more conventional means of banking, for instance, make sure to exclude accounts that operate exclusively online.
• Whether any penalties apply. Some accounts may limit the number of withdrawals you can make in a certain period before incurring a penalty, which can be a problem if you need regular access. Similarly, you could be penalised when attempting to withdraw funds early from fixed bonds or notice accounts, so it’s always important to check the account details beforehand.

Our chart above shows you the latest rates available as well as account details, helping you make informed monthly savings account comparisons. Using our ‘Full Search’ filter, you can tailor your search to better help you decide which account is right for you.