Is it really fair?

Is it really fair?

Savers may be the winners in the bank funding wars; with interest paid on cash accounts continuing to outstrip returns from the share market. But new research shows that many loyal customers, who have long held savings accounts with a single institution, may be coming off second best.

That’s because existing savers aren’t typically eligible for an institution’s “welcome rate”, which they say is reserved for new customers.

For instance, new customers can open a RaboDirect high interest savings account and get a whopping 6.01 percent per annum for the first four months on balances up to $250,000, while existing customers earn a base rate of 5.4 percent per annum That’s a big difference of 61 basis points.

New customers who open an ING Direct Savings Maximiser can earn 5.86 percent for four months, compared to the base rate for existing customers at 4.5 percent; a difference of 135 basis points.

On a $20,000 investment, that could see existing customers miss out on a maximum of $92 in interest during the promotional period (with ING Direct).

Clearly, when it comes to savings accounts, loyalty doesn’t always pay. But is this really fair?

Luring savers with offers that revert to a lower rate after a period of time is something the Australian Securities and Investments Commission (ASIC) has been watching closely. Money Magazine reports that “dual pricing”, as it’s sometimes called, is not limited to online accounts; a review by ASIC of the term deposit market in late-2010, found that seven out of eight deposit-taking institutions using dual pricing.

So what can you do about it? The obvious option is to become a rate chaser and follow the good deals. But with many promotional periods lasting just a few months, who has the time or energy to constantly move their money?

If your institution offers a promotional rate to new customers, that you feel you deserve, contact your bank and see what they can do for you. If they aren’t prepared to extend the offer to you, then consider switching to an account with a high ongoing rate. UBank‘s USaver account pays a maximum ongoing rate of 6.01 percent, while ANZ‘s Progress Saver pays 5.76 percent with no end date, to name just two.

The catch with some online savings accounts is that they tend to have conditions attached to getting the maximum rate of interest paid. Take UBank‘s USaver account for instance; a customer must be in a position to make regular deposits (a monthly minimum of $200) to achieve a maximum rate of 6.01 percent, ANZ requires a minimum deposit of $10 and no withdrawals during the month to achieve the maximum rate on its Progress Saver account.

The truth is, most savers don’t move their money around very often and institutions rely on this inertia. So if you’re in the market for a savings account, and unless you’re prepared to “keep it moving”, take a long-term approach and make sure the revert rate is worth signing up for.

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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 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.

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 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.

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.

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.

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.

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.

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.

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 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. 

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

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.

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.