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Why is there such a big difference in interest earned between accounts offering almost the same rate?

Information verified correct on December 6th, 2016

Even a slightly higher interest rate can help you reach your savings goals much sooner.

Finding the best savings account interest rate is vital to help you grow your balance as quickly as possible. But is a slightly higher interest rate really going to make a difference? The answer is a resounding yes! Even though an interest rate difference of 0.5% p.a. might not sound like much, the extra money you save with a higher rate can quickly add up. There are many terms and conditions that can distinguish one savings account from the other but there are some key things to look out for when deciding where to place your savings.

ING DIRECT Savings Maximiser

ING Direct Savings Account Offer

Apply for the ING DIRECT Savings Maximiser and receive a high interest rate of 2.75% p.a. when you link with an Orange Everyday account and deposit $1,000+ from an external account each month.

  • Maximum Rate: 2.75% p.a.
  • Standard Variable Rate: 1.60% p.a.
  • Bonus Rate: 1.15% p.a.
  • Monthly Account Fees: $0
  • Minimum Balance: $0
  • Minimum Deposit: $0

Compare high interest savings accounts

Rates last updated December 6th, 2016
$
$
months
Maximum Variable Rate p.a. Standard Variable Rate p.a. Bonus Interest p.a. Fees Min Bal / Min Deposit Interest Earned
ME Online Savings Account
Ongoing, variable 3.05% p.a. rate when you link to a ME Everyday Transaction account and make a weekly purchase with your Debit MasterCard using tap & go. Available on balances up to $250,000.
3.05% 1.30% 1.75% $0 $0 / $0 Open More
RaboDirect High Interest Savings Account
Introductory rate of 3.20% p.a. for 4 months, reverting to a rate of 2.05% p.a. Available on balances below $250,000.
3.20% 2.05% 1.15% $0 $0 / $0 Open More
ING DIRECT Savings Maximiser
Ongoing, variable 2.75% p.a. when you link to an ING Orange Everyday bank account and deposit $1,000+ each month. Available on balances up to $100,000.
2.75% 1.60% 1.15% $0 $0 / $0 Open More
Bankwest Hero Saver
Ongoing, variable 2.65% p.a. rate when you deposit at least $200 each month and make no withdrawals. Available on balances up to $5,000,000.
2.65% 0.01% 2.64% $0 $0 / $0 Open More
AMP Saver Account
Introductory rate of 2.55% p.a. for 4 months, reverting to a rate of 2.10% p.a. Available on balances below $5,000,000.
2.55% 2.10% 0.45% $0 $0 / $0 Open More
ANZ Online Saver
Introductory rate of 2.85% p.a. for 6 months, reverting to 1.25% p.a. Available on the entire balance.
2.85% 1.25% 1.60% $0 $0 / $0 Open More
Westpac eSaver
Introductory rate of 2.71% p.a. for 5 months, reverting to a rate of 1.25% p.a. Available on the entire balance.
2.71% 1.25% 1.46% $0 $0 / $0 Open More
St.George Maxi Saver
Introductory rate of 3.00% p.a. for 3 months, reverting to a rate of 1.05% p.a. Available on balances below $5,000,000.
3.00% 1.05% 1.95% $0 $1 / $1 Open More
Bank of Melbourne Maxi Saver
Introductory rate of 3.00% p.a. for 3 months, reverting to 1.05% p.a. Available on the entire balance.
3.00% 1.05% 1.95% $0 $1 / $1 Open More
BankSA Maxi Saver
Introductory rate of 3.00% p.a. for 3 months, reverting to a rate of 1.05% p.a. Available on the entire balance.
3.00% 1.05% 1.95% $0 $1 / $1 Open More
ANZ Progress Saver
Ongoing, variable 1.91% p.a. when you link to any Australian everyday bank account and deposit $10+ each month. Available on the entire balance.
1.91% 0.01% 1.90% $0 $10 / $10 Open More
Westpac Reward Saver
Ongoing, variable 1.85% p.a. when you deposit at least $50 and make no withdrawals each month. Available on the entire balance.
1.85% 0.01% 1.84% $0 $0 / $0 Open More

Why it's important to find the best rate

Unlike everyday transaction accounts, a savings account lets you earn interest on your account balance. The rate you earn is set by the banks and rises and falls in line with the Reserve Bank's official cash rate. An important part of choosing the right savings account is finding the account with the best interest rate – the higher the interest rate, the quicker your savings balance will grow. While the difference between interest rates offered on different accounts might sound like a minor amount, for example 0.25% or 0.50% p.a., this small variation can equate to a big difference in your savings balance.

Compound interest

Not only do savings accounts pay regular interest on the initial amount you deposit into your account, but compound interest means that you earn interest on your interest. So even though a difference of 0.25% sounds small, when you invest money for 12 months or more and it earns monthly interest at a slightly higher rate, you end up with a noticeably larger balance at the end of the investment period.

Interest and incentives

It’s also important to drill down on the fine details of the savings account you choose. Some accounts calculate the interest on the whole amount while others calculate the interest once your balance reaches a certain amount. There are also incentives such as earning bonus interest on top of the standard variable interest if you meet certain terms set by the bank. For example, if you deposit a set minimum amount of $1000 per month into the account, you earn bonus interest on top. Some savings accounts can cap the interest earned once your balance reaches a certain amount. For example your account can earn 3% interest on the whole amount up to $250,000. Once the amount is reached, your account will stop earning interest. View traps to avoid

Calculating the difference

The best way to demonstrate the difference a slightly higher interest rate can make to your overall balance is through a couple of case studies. Alternatively, our savings calculator shows the difference a higher (or lower) interest rate could make for you.

0.50% p.a. difference

sally-case-study

Let’s take the example of Sally, a 25-year-old PR consultant who wants to start saving a deposit for a house. Sally has a starting balance of $10,000 and, after working out a budget, has calculated that she can set up a direct debit of $150 from her salary into a savings account each and every week. Sally compares her savings account options and narrows her choice down to two accounts with separate banks. Account A offers an interest rate of 3% p.a. on her savings balance, but Account B offers an interest rate of 3.5% p.a. Interest is compounded monthly on both accounts. Sally crunches the numbers to see whether the higher rate will make any great difference to her end balance.

Account AAccount B
Interest rate3% p.a.3.5% p.a.
Starting balance (Principal)$10,000$10,000
Weekly investment$150$150
Balance after 1 year$18,212$18,282
Compound interest earned after 1 year$412$482
Balance after 2 years$26,674$26,859
Compound interest earned after 2 years$1,074$1,259
Balance after 5 years$53,637$54,462
Total interest earned after 5 years$4,637$5,462

As you can see, after five years, Sally’s balance will grow by an extra $825 if she selects Account B. That’s extra money that Sally hasn’t had to lift a finger to earn – all she had to do was choose the account with the higher interest rate.

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0.25% p.a. difference

kevin-case-study

Now let’s look at a different example with an even smaller difference in interest rates. Kevin, 35, wants to start putting some money away to help put his kids through university. He has a starting balance of $20,000 and can afford to deposit $200 into a high-interest savings account each month. He compares two savings accounts that compound interest monthly, one that offers a rate of 3.00% p.a. and the other that offers a rate of 3.25% p.a. The results of the comparison are shown in the table below.

Account AAccount B
Interest rate3.00% p.a.3.25% p.a.
Starting balance$20,000$20,000
Monthly investment$200$200
Balance after 1 year$23,042$23,096
Compound interest earned after 1 year$642$696
Balance after 2 years$26,176$26,294
Compound interest earned after 2 years$1,376$1,494
Balance after 5 years$36,162$36,535
Total interest earned after 5 years$4,162$4,535

Once again, the slightly higher interest rate on Account B equates to a much higher return after five years – this time $373 more than Account A. Even after two years of saving, the balance in Account B would earn $118 more than in Account A, clearly demonstrating the difference even a slightly higher interest rate can make.

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Traps to avoid when comparing savings account interest rates

When comparing savings accounts and the interest rates they offer, be aware that you may need to satisfy certain conditions in order to achieve the highest available rate. For example, you may need to deposit a minimum amount into your account each month or not make any withdrawals. In other circumstances, you may need to open a linked transaction account with the same bank to access the high interest rate advertised. If you fail to meet these conditions, you may receive a much lower interest rate or even earn no interest at all for that particular month. Find out more about the benefits and terms and conditions of bonus saver accounts. Some accounts also only offer the attractive advertised rate for an introductory period, such as four or six months. Once that period ends, the account reverts to a much lower rate. These are known as introductory bonus savings accounts and you can find out more about them on our introductory bonus savings accounts page.

What to look for when comparing savings accounts

You’ll need to take the following factors into consideration when choosing a savings account:

  • The interest rate. The higher the interest rate, the harder your money will work for you. Look for an account that offers an interest rate higher than, or at least on par with, its competitors.
  • Check the terms and conditions. Some high-interest savings accounts come with a number of terms and conditions attached, such as the requirement to deposit a minimum amount each month in order to achieve the high interest rate. Make sure you know what you need to do to achieve the maximum rate and what will happen if you fail to meet the terms and conditions.
  • Are there any hidden fees? Any benefits offered by a higher interest rate could be quickly made redundant by excess fees and charges on your account. Look for a savings account that charges no ongoing fees or transaction fees.
  • Ask whether you can easily access your money. Check to see how you can access your money and when. For example, can you withdraw money at short notice in case of an emergency? Can you manage your account by visiting a bank branch or can you only access your funds online?
  • Choose a trusted and reputable financial institution. Is the account offered by a trusted and reputable financial institution? If there’s a requirement to open a linked transaction account with the same bank, is that linked account suitable for your needs?
  • Customer service options. If you ever have a question about your account or need help with a transaction, will you be able to quickly access customer support online, over the phone or in a branch?

A slight variation in interest rates can make a big difference to the size of your savings balance. Compare savings account interest rates to find the best interest rate and achieve your savings goals sooner.

Clarizza Fernandez

Clarizza is finder.com.au's assistant publisher for banking and investments. She works to empower consumers in making informed decisions on all things banking and investments. In her spare time, she Googles: 'Sydney's best dog parks' and 'Best pasta Sydney.'

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Related Posts

Savings Account Offers

Learn about our information service
ME Online Savings Account

Maximum Variable Rate

3.05%

Standard Variable Rate

1.30
ING DIRECT Savings Maximiser

Maximum Variable Rate

2.75%

Standard Variable Rate

1.60
Bankwest Hero Saver

Maximum Variable Rate

2.65%

Standard Variable Rate

0.01
RaboDirect High Interest Savings Account

Maximum Variable Rate

3.20%

Standard Variable Rate

2.05

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