How do savings account interest rates work?

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At a glance:

Savings interest is money you earn from keeping your money with a bank or building society.

Savings interest rates can be variable or fixed. Variable, sometimes called easy access, means they can go up or down. Fixed means your interest rate stays the same for a set amount of time.

You can get your interest paid every month or once a year.

What is an interest rate for a savings account?

An interest rate on a savings account is the amount the bank or building society will give you for keeping your money with them. Think of it as a reward for saving money. Some current accounts might pay interest on the money in your account, but it’s often lower than savings accounts.

If you borrow money, for a loan or mortgage, an interest rate is the cost of borrowing that money. So you pay interest on money you borrow, or you earn it from money you save.

Savings interest rates and the Bank of England base rate

The Bank of England set a base rate and financial service companies use this to work out what their interest rates should be. So if you have a savings account with a variable interest rate, it’s likely to change if the base rate changes. But if your interest rate is fixed, it won’t change.

Fixed vs variable interest rates?

Variable interest rates:

A variable interest rate, sometimes called easy access, means the interest rate can go up or down.

If your account has a variable interest rate, you’ll often have lots of access to your money.

Fixed interest rates:

A fixed interest rate means the interest rate stays the same for a set amount of time.

Accounts with fixed interest rates usually don’t let you withdraw your money until the end of your fixed rate.

But some fixed rate accounts might have conditions you must meet to keep the fixed rate, such as only withdrawing money a certain number of times a year.

How is savings interest calculated?

Savings interest is usually calculated at the end of every working day, on the full balance of your account.

Savings account interest example

You have a savings account with a fixed interest rate of 4%. It’s fixed for one year.

You pay £1,000 into your account.

Your interest is paid once a year.

After one year, your new balance is £1,040.

What is AER?

AER stands for Annual Equivalent Rate. It’s the rate that’s most often used to compare different savings accounts. It shows you what you can earn over a year, including any compound interest.

What is compound interest?

Compound interest is when you earn interest on the money you’ve already saved and on the interest you’ve already earned. So in other words, it’s extra interest on top of the interest you’ve already earned.

Not all savings accounts give you compound interest, so be sure to check.

What is a certificate of interest?

A certificate of interest is a statement that shows how much interest your savings earned in a tax year. It can be helpful if you need to complete a tax return.

If you have a YBS account which you manage online, you can log in to your account to download or print a certificate of interest. Or contact us to ask for one.