Traditional savings accounts are basically useless: Here’s how to get a good rate

Posted: 21 September 2019 11:37 am
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Banks are driving the interest rates of basic saving accounts into the ground, but there are alternative products offering much better value.

With the RBA cash rate at a rock-bottom 1% right now, it can be difficult to glean any value from your savings. However, our current low-interest environment is only part of the problem.

The cash rate determines the cost that your bank pays to the Australian central bank to borrow money. A high cash rate means that borrowing is expensive, and banks become more reliant on the cash in their (digital) vaults. To attract more savings, they generally increase the interest rate paid to customers. A low cash rate has the opposite effect. Traditionally, the average savings rate has directly tracked the cash rate. In fact, they have been almost exactly the same since the RBA started keeping records in 2004.

Note: The RBA classifies traditional savings accounts as "online savings accounts" - a slightly outdated definition as all bank accounts are currently accessible online.

A closer inspection of the online savings rate on the above chart reveals that this tracking behaviour changed dramatically in late 2017, with the average online savings rate dropping well below the cash rate and staying there. This has resulted in an average online savings rate (0.45%) that is less than half of the cash rate (1.00%). So, what's happening?

(Restricted) bonus savings accounts

The chart below zooms in on the more recent (2012–2019) period and includes a second group of savings products called bonus savings accounts. Bonus savings accounts are, according to the RBA who compiles this data, deposit accounts which pay a higher rate of interest if at least one deposit and no withdrawals are made each month. In other words, you need to put some money in every month, but if you take too much out you may lose your high interest rate. In this data, the average of the five largest banks is used. As you can see, these accounts tend to offer a better rate than traditional savings accounts. This makes sense, as your money is partially locked in, so it offers more reliability for the banks. These accounts are currently offering 1.75% on average. However, even better value can be had.

Non-restricted bonus accounts

Many of the smaller online banks offer higher bonus interest rates which have less-restrictive conditions. In general, if you open a transaction account and do your day-to-day banking (details below) with these banks, that's sufficient to unlock the bonus rate. There are no specific investment requirements here – once your wages are deposited, you're free to withdraw them or otherwise use them as you see fit. While these products are not monitored by the RBA specifically, the average rate across five of the best right now is 2.39%.

So how much extra can you actually make?

According to a Finder survey of 5,000 Australians conducted from May to September 2019, the average person saves around $650 per month and has $28,500 in their savings account. The table below depicts the resultant interest for the average Australian over three years. As you can see, the highest-rate accounts generate a significant $3,091, far over the $542 generated by old-fashioned savings accounts.

Rate 3-year interest based on average savings
Average basic (online) savings accounts 0.45% $542
Average bonus savings accounts 1.75% $2,142
ING 2.20% $2,709
ME Bank 2.35% $2,900
UBank 2.41% $2,976
86400 Bank 2.50% $3,091
UP Bank 2.50% $3,091

Is there a catch?

As mentioned above, there are no withdrawal restrictions on these accounts. However, there are some criteria which need to be fulfilled in order to keep the higher interest rate. These often involve opening an associated transaction account and are usually easily fulfilled by doing your day-to-day banking with the same bank. Additionally, some banks have limits on how much you can have in your account. Details of the specific requirements of each product are listed below:

Bank Rate Limit Monthly criteria
ING 2.20% $100,000 Associated transaction account. Deposit $1,000. Make five debit card purchases.
ME Bank 2.35% $250,000 Associated transaction account. Make one debit card purchase.
UBank 2.41% $200,000 Associated transaction account. Deposit $200.
86400 Bank 2.50% $100,000 Deposit $1,000.
UP Bank 2.50% $50,000 Associated transaction account. Make five debit card purchases.

Also worth noting here is that none of these accounts charge any fees, and the associated transaction accounts for some such as ING's Orange Everyday (winner of Finder's Best Transaction Account 2019) come with other useful extras such as free global ATM withdrawals and no-fee international transactions. A little effort here can go a long way.

Graham Cooke's Insights Blog examines issues affecting the Australian consumer. It appears regularly on finder.com.au. For regular updates check out twitter @gcooke42.

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