Monthly interest savings accounts explained

Savings accounts are a great way to earn interest and financial peace of mind, but not all accounts are created equal, and it’s always worth comparing different types of savings accounts to find one that suits your needs. 

On this page, you’ll find out more about monthly interest accounts, how they work, what types of savings accounts pay monthly interest and how compounding can make a big difference to your savings.

Regular savings accounts require you to put money away each month, usually between £25 and £250, with interest paid yearly. They tend to have better interest rates than standard savings accounts, but impose rigid terms and conditions, such as low maximum deposit limits, to moderate the interest you can actually earn.

Monthly interest savings accounts are simply a type of savings account that pays interest monthly. 

You may have also heard of monthly income bonds, but although they sound similar to monthly interest savings accounts, they are different. Monthly income bonds are provided by National Savings & Investments (NS&I), which is backed by the Treasury. They pay interest monthly but don’t offer the benefit of compound interest.

Monthly interest savings accounts pay interest monthly, either into a bank account you nominate or into your savings account through compounding (more on this below). 

What’s the difference between monthly interest and annual interest?

The difference between monthly and annual interest is that annual interest is paid annually, whereas monthly interest is paid monthly, making it a good option if you want a regular income stream. 

However, savings accounts that pay interest annually typically offer more competitive interest rates because of the effect of compounding. In simple terms, rather than being paid out monthly, annual interest can accumulate with the sum you’ve invested. 

Is monthly or annual interest better?

When it comes to saving and investing your hard-earned money, one critical decision you’ll have to make is how often you want to receive interest payments. Monthly interest payments are a popular choice for those who rely on their savings as a source of income, or for individuals looking to maximise their liquidity. However, it’s worth checking exactly how much interest you’ll earn.

For example, a regular savings account may offer a high interest rate, but there’s a limit on how much you can deposit (for example, £200 a month), and you would only get the benefit of the full interest rate on £2400 (£200 a month for a year) at month 12. In comparison, if you deposited £2,400 into a 1-year fixed rate bond, you would start earning interest on the full amount from the first day, thanks to the effect of compounding.

What is compound interest, and how does it work?

Compound interest is the interest you earn from your original deposit combined with the interest you’ve earned so far. You might find that the best monthly interest accounts are also the ones which offer compound interest, as you’ll keep earning interest on each previous month’s interest. This could mean your savings grow quicker.

A number of different types of savings accounts have the option to pay interest monthly, although it’s important to check the details of each individual savings account to confirm this is the case before applying. The following savings accounts may pay monthly interest: 

• Fixed rate bonds typically offer competitive interest rates if you have a lump sum to deposit that you won’t need to access for a set term, usually between six months and five years. Fixed rate bonds which offer monthly interest are amongst the best types of savings accounts to consider, because of their competitive interest rates and the effect of compound interest.
• Fixed rate cash ISAs, or individual savings accounts, are similar to fixed rate bonds, but your savings are tax-free up to £20,000 per financial year (usually 6th April to 5th April). 
• Easy access accounts are designed for flexibility and offer competitive variable rates of interest. They might be a good option for you if you want to earn interest every month and want the convenience of being able to top and withdraw from your savings whenever you want.
• Notice accounts offer the flexibility of easy access accounts, but usually feature more competitive interest rates.

Not all of these types of savings accounts will always pay interest monthly, so it’s always worth checking the account details.

How to calculate monthly interest

To calculate the monthly interest on your savings account, simply divide the annual rate you see on the account by 12. This will show you the rate you’d get in each of the 12 months in a year. For example, let’s say the AER is 5%. If you divide 5% by 12, that means you’ll get 0.417% interest on your money each month. Alternatively, you can find interest calculators online.

Monthly interest accounts allow you to earn interest more frequently than savings accounts which pay interest annually, so you could earn more from your savings. This type of savings account might be right for you if you want to see faster results from your savings rather than waiting for an annual interest payment. Some monthly interest accounts also offer compounding interest.

What are the benefits of monthly interest accounts?

Monthly interest savings accounts provide a regular supplement to your income, which is good if you’re looking for an account that tops you up each month. 

The variety of different accounts available allow you to choose a savings account that works best for you and your lifestyle, with features such as instant or restricted access and the option to deposit more money when you want to. 

As we mentioned above, monthly interest accounts also mean that you won’t have to wait a full 12 months to see a return on your savings, which is ideal if you want to see visible results quickly and stay motivated.

If you open a monthly interest savings account with a UK-regulated bank, the Financial Services Compensation Scheme (FSCS) protects your deposit, up to £85,000 per person, per banking group. The FSCS protects deposits in the event a financial institution is dissolved or fails. At Raisin UK, we want to protect your savings, so we only allow you to make deposits of up to £85,000 per person, per banking group. 

Likewise, if you open a monthly interest savings account with one of our European partner banks, your money will be covered by the European Deposit Guarantee Scheme (DGS). It works in a similar way to the UK’s FSCS, and protects up to €100,000 (or the equivalent amount in local currency) if the financial institution fails.

The best monthly interest savings account is likely to differ from person to person, depending on your financial situation, how much you have to invest and what your savings goals are. You can find the best monthly interest savings account for you and maximise the return on your money by completing a small amount of your own research and comparing different monthly savings accounts.

It’s easy to compare monthly interest savings accounts online by using savings comparison tables, or by visiting your bank’s local branch and seeing what they have on offer. However, by comparing savings accounts online, you’ll have a larger choice of accounts and providers. And of course, remember to look into the terms and conditions of each product to ensure it will suit your needs.

To get the best interest rate on a monthly interest savings account, you could consider opting for an account with a larger amount of restrictions, such as fixed rate bonds which lock your money away over a set period of time, because these types of savings accounts will often offer higher rates of interest. Terms range from between six months and five years, with longer terms typically paying the best interest rate.

Before you commit to this type of account, however, you should ensure that the restrictions in place on the account suit your savings goals.

There are a few important questions you should ask yourself before you commit to opening a savings account:

• Does this savings account work for me? 
• Does the account have a minimum/maximum opening deposit requirement? 
• Are there any restrictions on accessing/withdrawing/depositing money? 
• Will this account help me meet my savings goals?

If you want to quickly and easily compare and open monthly interest savings accounts, register for a Raisin UK Account and apply today. Opening an account with Raisin UK is free, and you’ll find competitive interest rates from a range of UK banks.  

If you have any questions, our UK-based Customer Services Team is happy to help.