Dollar wars: The best place for your hard earned savings

Tech-savvy individuals have long used online savings accounts with high interest rates as their preferred method of saving. In recent times, the competition between institutions for the business of online savings customers has become so fierce that many now offer substantially higher interest rates for their online product than they do for their term deposit accounts. Why then, would you choose to lock your money away in a term deposit for three years at a lower rate, when an at-call online saver could now yield as much as 7.0% interest per annum?

The simple answer for many people is that you wouldn't. When it comes to savings products, there are two predominant features which consumers place at the top of their shopping list - interest rate, and accessibility. Common sense would suggest that if you lock your money away for a period of time in a term deposit, you would expect a higher interest rate in return. This is often now not the case, and for this reason online savings accounts are gaining in popularity.

Why then, are banks unable, or unwilling to offer higher interest rates on term deposit accounts? The reasoning behind this phenomenon differs for each institution. It is believed that some institutions are using their online savers as a marketing tool to attract new customers. But this practice is not limited to banks. Fruit shops may sell strawberries at $2 a punnet and sustain a loss in order to attract customers inside where they will inevitably purchase a bottle of milk and some other groceries for dinner that night. Likewise, even if institutions don't make much money from their online savings product, they can use it to up sell mortgages, credit cards and other products, which will in turn generate greater returns.

Bryan Jones of Railways Credit Union spoke with us about online savers. He suggested that there is currently some uncertainty about when the next interest rate move will be, and the direction it will take. For this reason, some banks may be less willing to risk locking in deposits at a high rate of interest if there is the slight chance of an interest rate drop around the corner.

"If the next interest rate move is down and you have a large portfolio of fixed term deposits locked in at higher rates from earlier in the cycle, then suddenly you are lending your funds out at a lower rate (to match the competition) but stuck paying higher rates until your deposits mature", commented Bryan. "Many institutions are offering their promotional/highest rate term deposits for 4 to 12 month terms in response to this (e.g. CUA, St George & Suncorp)."

Online savers definitely still rule the roost as far as returns go, but there are still some people who prefer term deposits. By locking away your money in a term deposit, you don't run the risk of being tempted to withdraw the funds. Term deposits also appeal to less tech-savvy individuals who prefer to do their banking over the counter. Despite the prevalence of online savers, there are still some great deals to be had in the term deposit market, if you're prepared to lock away a larger amount of cash. Railways Credit Union currently offers the highest fixed term interest rate for deposits over $20,000 at 7.05% for a term of 3 - 12 months, with the interest paid on maturity.

BankWest's TeleNet Saver and ING Direct's Savings Maximiser are currently the top two online savers, both offering 7.0% interest. However, the BankWest rate is only valid for 12 months, after which the rate reverts to 6.5%, and ING's rate of 7% is a promotion only available for new customers until the end of 2007. Whatever your preference, be it a term deposit or an online saver, do your homework and you will be rewarded.

How do I compare savings accounts and term deposits?

RateCity is the best website to shop around on for all savings accounts and term deposits, as well as most other financial products. At RateCity, you can use expert comparative data from CANSTAR CANNEX, Australia's leading financial research and ratings firm. CANSTAR CANNEX has analysed and evaluated hundreds of financial products to award five stars to only the very best. The CANSTAR CANNEX star ratings go much further than just looking at interest rates. They also take into account important features so you can be confident you are getting the best product.

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