AER Explained (Cracking the jargon code)

At Pure Properties we try to avoid using jargon that non Estate Agents wouldn’t understand. We try to keep things simple so you’re fully informed along the way. With that in mind, let’s try and explain a financial term you might come across.

AER stands for ‘Annual Equivalent Rate’ and is used for savings. It shows the rate of interest a saver will receive over a year assuming the cash is left in the account for the full year. Its aim is to demonstrate what your interest return would be if the interest was compounded and paid annually instead of monthly or any other period.

It’s actually very easy to calculate what your savings will be worth in one year if you know the AER. For example:

Starting Amount = £1,000
Time = 1 year
AER: 5%
Total Balance at the end of the year = £1,050.

You simply multiply the original amount by the AER to calculate what your savings will be worth in 1 year.

If an account pays interest more than once a year, say for example monthly or quarterly, then the AER is calculated by adding each interest payment to the deposit and then calculating the next interest payment compounding the interest. Thus on accounts where interest is paid monthly, the AER will be slightly higher than the quoted gross rate because of the compound interest earned on the interest paid during the year.

The difference will usually be very small (less than 0.1%) which amounts to less than £1 per £1,000 in savings, so not particularly important. However, if you have large savings then this is a different matter as even small percentage differences can amount to several hundred pounds in extra interest over the year. This is why people who normally use their savings to fund their retirement tend to opt for savings accounts that pay monthly.

If you come across any other technical terms you’d like to have explained, do let us know so we can use them in future blogs.

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