Compounding and capitalisation

Interest is earned every day. It joins the balance only now and then. Those are two different events on two different dates, and the gap between them is where most customer questions live.

Accruing and capitalising are not the same thing

Accrued interest is money the customer has earned but cannot yet spend. It sits in its own balance, outside the current balance. A partial withdrawal cannot reach it. See taking money out and position types.

Capitalising moves it across. From that moment it is ordinary balance — withdrawable, and itself earning interest. That is all compounding means here. How much interest accrues each day is a separate question; see how interest is calculated.

The interest anniversary

The interest anniversary is the schedule that decides when accrued interest capitalises. In a typical deposit configuration it is monthly, starting one month after the account opens, so an account opened on the 15th capitalises on the 15th of every month.

The frequency, the first date, and which products carry an anniversary at all are things your organisation configures.

flowchart TD
    A[Interest accrues every day] --> B{Is today the<br/>interest anniversary?}
    B -->|No| A
    B -->|Yes| C[Accrued interest capitalises]
    C --> D{Interest payment method}
    D -->|Capitalise| E[It stays in the balance<br/>and earns interest]
    D -->|Pay| F[It leaves for the<br/>nominated account]

Capitalisation runs before that day’s accrual. So the amount that capitalises is the interest earned up to and including the previous day, and the rest of the day accrues on the new, larger balance.

Interest always capitalises first

Even on an account that pays its interest away, the interest capitalises and then leaves as a second movement. It is never paid straight out of the accrued balance.

This is deliberate. A customer looking at the transaction list sees the interest they earned, whether they keep it or take it. A payment that never touched the balance would be invisible there and would break the arithmetic on the statement. See reading the transaction list and where interest is paid.

Worked example

An account holds 100,000 with 750 of interest accrued, and today is the anniversary.

Either way the accrued balance goes back to zero and the earning starts again from there. Only the paying account sends anything out.

If the account is set to pay interest away but has no usable destination on file, the payment does not happen and the capitalisation still stands. The interest is safe in the balance, and the missing destination is on the account’s history for someone to fix.

Where the anniversary lands

An anniversary is a date, so it can fall on a weekend or a public holiday. The business day convention and calendars on the anniversary itself decide which way it moves. See business day conventions.

Daily accrual never moves. Interest accrues on every calendar day, weekends included, so a capitalisation that rolls forward two days simply picks up two more days of interest.

The last capitalisation on a term deposit

A deposit with a maturity date capitalises one final time, on the maturity date itself. That final capitalisation is anchored to the contractual maturity date and does not move for a weekend, even where the monthly anniversary does. The cash that follows it settles on the rail’s own timing. See maturity instructions and value dating.

Worked example

A three-month deposit opens on 15 January 2021 and matures on 15 April 2021, with a monthly interest anniversary.

The accrued balance ends at zero. Nothing is left behind for the customer to chase.

Capitalisation is never a step on its own

You will not find capitalisation in the list of actions on an account, and there is no way for an operator to select it. It always happens as part of something else:

• On the interest anniversary, at end of day.
• On the maturity date of a term deposit.
• Inside Withdraw All Funds and a full-balance Early Withdrawal, so the customer’s last day of interest reaches them. See taking money out.
• When a notice for the full balance falls due. See notice periods.
• When a small residual balance is written off, so nothing is stranded in the accrued balance.

So a capitalisation line on a transaction list is a movement between two balances on the same account. No money enters or leaves the organisation, and nothing reaches a payment rail. What that line is called is one of the transaction type labels your organisation configures; see transaction types.

Tax withheld at capitalisation

Where your organisation withholds tax on interest, the capitalisation is the point at which it is withheld — not the daily accrual. The accrued balance is discharged in full, the customer receives the net, and the withheld amount goes to the tax liability.

Whether a holder is withheld at all, and at what rate, follows their tax status. See tax residency.

Worked example

A holder withheld at 15% reaches an anniversary with 1,000 of accrued interest.

The gross 1,000 stays on the transaction, because that is the figure the customer’s tax certificate has to show. See tax certificates.

Statements can follow the anniversary

On products configured that way, the statement cycle is driven by the same schedule as capitalisation. The statement then lands on the interest anniversary, and moving the anniversary moves the statement dates with it. See statements.

Changing the interest anniversary

Change Interest Anniversary moves the schedule on one account. It is offered on the deposit products your organisation configures it for, and it needs a countersignature.

1. Open the account and select Change Interest Anniversary.
2. Select Edit beside Interest Anniversary.
3. Set the Start Date, the Frequency, and how often it repeats.
4. Set the Business Day Convention and the Calendars that go with it.
5. Save the schedule, then confirm the change.

The form shows the anniversary the account has now, so you can see what you are changing before you change it.

What the change will not let you do

Nothing posts when the change is refused. The anniversary the account had is the anniversary it still has.

What else moves with it

Changing the anniversary changes every process driven by that schedule on that account — capitalisation, the interest payment that follows it, and, on products configured that way, the statement cycle. Check what the product uses it for before moving it for one customer’s convenience.

Related

• How interest is calculated — what accrues each day.
• Day count conventions — the divisor behind a daily accrual.
• Where interest is paid — the destination for a paying account.
• Changing a rate — the rate the accrual runs on.