Interest rates, the good and the bad for Aussies

Interest rates give Aussies wins and losses

Often, when talking about the official cash rate, we tend to see it as the be-all and end-all. And while the cash rate is doubtless critical to the ultimate direction of interest rates, they don’t always exactly follow the decisions of the Reserve Bank of Australia. 

“What is less known, is that interest rates are constantly on the move,” said Peter Arnold, RateCity product director. 

“The November-to-December quarter was no exception, with rate movements across all categories evident.”

In our Rates of the Nation report for the first quarter of 2015, RateCity outlined the various interest rate movements in a number of different categories. 

Fixed rates and credit cards see downward trends

When it comes to home loans, five-year fixed rates saw the biggest drop, with a 0.08 percent fall. Variable rates fell a respectable 0.04 percent, but were still higher than fixed rates, ending up at 5.33 percent by January 1.  

Much of the fixed-rate movement was due to the non-major banks, something particularly evident in the case of one-year fixed rate home loans. While the majors kept the rate steady at 5 percent between July and January, rates fell gradually among other lenders during this same period. 

This suggests that, with both types of rates seeing gradual drops, now could be a good time to do a home loan comparison and see what’s out there — particularly among the non-major lenders.  

Credit card rates saw a similar downward trend in this same period, though the report only covers movements among the big four banks. Purchase rates fell from 17.06 percent to 16.91 percent between October 1 and January 1. Also gratifyingly for consumers, annual fees dropped $5.20 in this same timeframe, with fees sitting at $89.34 now. 

“This was a shift from the previous three months when we saw the average purchase rate rise,” commented Mr Arnold. 

A double-edged sword for savings

While Aussies are no doubt celebrating the savings they’re making from these lower rates and reduced fees, the flip side of that is that these savings are not accruing interest the way they used to. 

“It’s more bad news for savers, particularly those living off their bank interest, those with retirement savings, and people saving for a house deposit,” said Mr Arnold. Deposit rates fell between 0.03 percent and 0.12 percent in the same quarter ending January 1.

With more cuts predicted in the future for the cash rate, it won’t get any easier for ordinary savers. 

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Learn more about savings accounts

What is the interest rate on savings accounts?

As banks frequently change their rates, the most accurate way to look at interest rates on savings accounts is to use a savings accounts comparison tool. When you look at the savings rate check what the maximum and minimum rates are. Often banks will offer you a promotional rate for the first few months which is competitive, but then revert back to a base rate which can sometimes be less than inflation. Ongoing bonus rates are often a safer bet as they will keep rewarding you with the maximum rate, provided you meet their criteria

How does interest work on savings accounts?

The type of interest savings accounts accrues is called compound interest. Compound interest is interest paid on the initial deposit amount, as well as the accumulated interest on money you have. This is different from simple interest where interest is paid at the end of a specified term. Compound interest allows you to earn interest on interest at a higher frequency. 

Example: John deposits $10,000 into a savings account with an interest rate of 5 per cent that he leaves untouched for 10 years. At the end of the first year he will have $10,512 in savings. After ten years, he will have saved $16,470.

How much money should I have in my savings account?

A good rule of thumb when working out a minimum balance for your savings account is to make sure that you’ll earn more in annual interest on your savings than what you’ll be charged in annual fees.

If you’re saving with a specific goal in mind, prepare a budget so the interest you earn on your deposits will help you efficiently reach this goal. Online financial calculators may be helpful here.

What is a good interest rate for a savings account?

A good rule of thumb to keep in mind with savings accounts is to look for a rate that is higher than the CPI inflation rate. This number is constantly changing, so check the Reserve Bank of Australia’s page. If you aren’t earning interest above this then the value of your money will go backwards over time.

Can you direct deposit to a savings account?

Yes. You can make one off payments or set up regular direct deposits into a savings account. This can be organised easily through online banking or by making deposits in a branch. Talk to your lender to find out the easiest way for you to set up direct deposits.

Who has the highest interest rates for savings accounts?

As banks frequently change their rates, the most accurate way to know who currently has the highest interest rate is to use a savings account comparison tool.

How to open a savings account for my child?

Some banks and financial institutions allow parents to open a bank account for their child as soon as it is born, and start depositing funds to go towards the child’s future.

Children’s savings accounts generally don’t have fees, and are structured to help develop positive financial habits by limiting withdrawals, encouraging regular deposits, and earning interest on the savings, similarly to standard savings accounts.

What is a savings account?

A savings account is a type of bank account in which you earn interest on the money you deposit. This makes it one of the easiest and safest investment tools.

Can I overdraft my savings account?

A lot of savings accounts won’t let you overdraw. Some will allow this feature but you’ll need to apply first. It’s best to read the fine print and check with your lender whether this is a feature they offer. It can be a helpful addition, but as your lender can charge you a fee as well as interest for going into negative numbers, it’s best to avoid overdrafting when possible.

Can you set up direct debits from a savings account?

It’s not usually possible to set up a direct debit from your savings account to cover ongoing expenses or bills, as savings accounts are structured around growing your wealth by earning interest on regular deposits, and discouraging withdrawals.

Some transaction accounts allow you to set up direct debits and also earn interest, though you may not enjoy as much flexibility as a dedicated transaction account, or get as high an interest rate as a dedicated savings account.

Can you have a joint savings account?

Yes. Joint savings accounts can be useful for two or more people wanting to combine their savings to meet shared financial goals, including spouses, flatmates and business partners.

Some joint savings accounts require all parties to sign before they can access the money. While less convenient, this extra security can help encourage all parties to meet their shared financial goals.

Other joint savings accounts allow any of the account holders to access the money. These accounts can be convenient for financially responsible couples that trust one another implicitly. 

Can you set up a savings account online?

Yes. Several large and small banks offer online applications for savings accounts, and there are also online-only financial institutions to consider.

Online-only savings accounts are often less expensive than other savings accounts, though they may not offer the same flexibility, features, or face-to-face service as more traditional savings accounts.

How to make money with a savings account?

Savings accounts make you money by earning interest on your savings. The more money you deposit, the longer you leave it in the account, and the higher the account’s interest rate, the more interest you’ll be paid by the bank or financial institution, and the more your wealth will grow.

To make sure your savings account makes money and doesn’t lose money, it’s important to maintain a large enough minimum balance that the annual interest earned exceeds any annual fees charged on the account.

How do I open a savings account?

Opening a savings account is a relatively simple process. If you’ve found an account with a suitable interest rate, you’ll just need to get in contact with your chosen lender via a branch, phone call or hop online to begin the process. 

You may be required to provide:

  • Personal details, including identification (driver’s license, passport etc.)
  • Tax file number
  • Employment details