The bad news is that banks have plenty of flexibility when notifying you of interest rate changes.
On 2 August 2016, the Reserve Bank of Australia (RBA) cut the official cash rate to a record low of 1.50%. The usual media focus following an interest rate drop is on how this will affect home loan customers, but any change to interest rates also has an impact on any Australian with a savings account.
Following the RBA’s August announcement, many banks and financial institutions across the country lowered interest rates on their savings accounts by anywhere from 0.10% to 1.65%. If you were unaware of the change, your savings account could be earning a much lower interest rate than you thought, which could cost you a substantial amount of money.
So, do banks need to notify customers when they lower the interest rate on a savings account? And how much notice do they need to give before the change takes effect?
Has your bank changed your savings account interest rate?
Savings account interest rate changes
Unlike home loan interest rates, changes to savings account rates aren’t announced immediately after the RBA makes an adjustment to the official cash rate. In fact, savings account rate cuts can even be made before the RBA makes any official announcement, as we saw when the previous rate cut occurred in May 2016.
But are there any requirements for your bank to notify you before they lower the interest rate on your savings account? The Australian Bankers’ Association’s Code of Banking Practice, which has been adopted by all of Australia’s major banks, outlines the guidelines with which any financial institution adhering to the code must comply. The relevant section for interest rate changes is Part E, clause 20. This relates to changes to terms and conditions and states:
“We will notify you of variations to the terms and conditions (other than a variation referred to in clause 20.1 or clause 20.2) in relation to a banking service by advertisement in the national media or local media or in writing to you, no later than the day on which the variation takes effect.”
This clause leaves the banks with plenty of flexibility when notifying customers of interest rate changes. In most cases, a bank will simply advertise the new rate publicly and then also document it on the customer’s statement.
What this means for you
Has the interest rate on your savings account ever changed without you being aware of it? Chances are you’re probably not alone. As you can see in the above excerpt from the Code of Banking Practice, your bank doesn’t have to send you any direct communication regarding rate changes to your savings account. This means it’s quite easy for the rate on your account to drop without you even realising.
There are a couple of issues that every savings account holder should be aware of. First, the advertisement of savings account rate changes typically takes place in the hard-copy versions of national newspapers. These announcements are often buried deep in the finance section and there is no requirement for the ads to feature in the online versions of those papers.
Second, while the adjusted interest rate will be reflected on your account statement, your account may be set up so that you only receive statements quarterly or every six months. Even then, it’s always easy to overlook the finer details and figures printed in a bank statement – after all, we’d much rather focus on the account balance than any of the nitty gritty details.
Unfortunately, what this means is that your funds could sit in your savings account for some time following an interest rate change without you knowing. While you think your money is working as hard as possible and your balance is growing at the maximum rate, that may not be the case.
The impact of an interest rate cut
An interest rate cut of 0.25% or 0.50% might not sound like all that much, but it can have a sizable impact on your savings balance. For example, let’s say you have a savings balance of $15,000 invested at 2.50%, but then your bank drops the rate to 2%. Over the course of a year, you’ll earn $76 less in interest.
While that might not sound like a huge amount on the surface of things, the effect of compound interest can quickly multiply the amount of money you’re effectively missing out on. And with the potential for interest rates to drop even further in the coming months, the net effect of a lower interest rate can be very detrimental to your bank balance.
How to stay aware of interest rate changes
If you want to make sure you’re always earning the best possible interest rate on your savings account, the key is to remain vigilant. Whenever the RBA announces a change to the official cash rate, contact your bank to find out whether this will have any impact on the rate that applies to your account.
It’s also a good idea to check your account statements regularly, regardless of whether or not you suspect a rate change may have occurred. This will help you stay on top of all your account information, from the total balance to the interest you are earning, and allow you to make sure that your money is always earning interest at the best rate.
How to earn the best interest rate on your savings account
There are plenty of other steps you can take to ensure that interest rate cuts have a minimal effect on your savings balance:
It’s a good idea to review your savings account regularly and compare your other options. There’s a huge range of savings account products out there, from high-interest online savings accounts to reward saver accounts, and it doesn’t hurt to shop around for an account that offers a better rate.
Consider a term deposit
Following the August rate cuts, Australia’s “Big Four Banks” and a few others made the surprising move to raise term deposit interest rates. As a result, you may be able to access a much better interest rate through a term deposit than through an ordinary savings account.
Earn bonus interest
Bonus saver accounts allow you to earn extra interest on top of the standard variable rate by satisfying special terms and conditions, for example depositing a minimum amount each month and not making any withdrawals. If one of these accounts sounds like it could be right for you, compare bonus saver accounts at finder.com.au today.