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What are monthly interest savings accounts?

Category: Savings
Author: Tim Leonard
Updated: 11/12/2017

Monthly interest savings accounts allow you to have your interest paid at monthly intervals.

Some accounts let you choose whether to have this interest paid into another savings or bank account (paid away), or to have the interest form part of your savings balance (compounded).

What are monthly interest savings accounts?

Monthly interest simply means the frequency that interest is paid – it's not a type of savings account in itself. So you can have monthly interest accounts that are cash ISAs, or normal savings accounts such as fixed rate bonds or easy access deals.

You may want to take your interest monthly if you use your savings interest to supplement your income, for example. Alternatively, you may just like to be able to see your interest applied to your balance every month, rather than wait until the end of a year or until a savings bond matures.

Interest 'paid away' into a separate account Interest paid (compounded) to your savings account
Have your interest paid into a separate easy access savings or bank account if you need to take an income from your savings. Have your interest paid to your savings account if you want to grow your savings pot. As the interest forms part of your savings balance, next time you're paid interest you'll earn interest on your original savings amount, plus on interest you've previously earned, too. This is known as compounding interest.
Because your interest is paid away, your savings pot will not be growing. After inflation, the real spending power of your savings pot may have fallen. Some monthly interest savings accounts insist that your interest is paid away to another account (they will not allow interest to be compounded).

4 things to consider about monthly interest savings accounts

1. Make the most of your cash ISA allowance

You get an annual tax-free cash ISA allowance. Some cash ISAs pay interest monthly. So, if you're a taxpayer, you could make more of your money by using this allowance.

Any interest you receive in a cash ISA will be tax-free. Interest from a normal savings account may be taxable if you earn interest over the Personal Savings Allowance (£1,000 for basic rate taxpayers or £500 for higher rate taxpayers).

2. Can you afford to not have access to your money?

The longer you can afford to not have access to your money, the higher the rate of interest you can secure. Easy access savings accounts tend to pay lower rates than notice accounts, with fixed rate bonds typically paying the most.

Fixed rate bonds come in a variety of terms – normally anything up to five or even seven years, with higher rates on offer the longer you are prepared to fix. However, if these offer a monthly interest option, this will most likely have a slightly lower rate of interest, and many won't offer such an alternative at all.

3. To fix or not to fix?

Talking of fixed rate bonds, there's another thing to consider: if you opt for a fixed rate bond you will get guaranteed interest for a set period. But if interest rates go up during the term of your bond, you may end up earning less than if you had gone for a variable rate savings account.

On the flipside, if rates go down, a variable rate could pay less interest than if you had opted for a fixed rate bond.

4. Watch out for bonuses!

Some variable rate accounts (and ISAs) have a rate that's comprised of an introductory bonus. These typically run for the first 12 months of you having the account.

When they end, your rate (and therefore your income) will be reduced – often by a substantial amount. If you take out a savings account with a bonus, be ready to review it when the bonus period ends to avoid a drop in income.

What next?

Compare monthly interest savings accounts (variable rate)

Search all savings accounts and cash ISAs

Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.