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Read the fine print on high interest savings account

Laine Gordon avatar
Laine Gordon
- 3 min read
Read the fine print on high interest savings account

There are plenty of good deals on savings at present but getting the best return means reading the fine print. An eye-catching rate can have strings attached, reports Chris Walker.

December 1, 2009

One of the key aspects to look out for when comparing savings accounts is whether an advertised rate is the ongoing rate your money will earn or if it’s a ‘bonus’ rate.

An ongoing rate applies indefinitely. A bonus rate, on the other hand, may last for a limited period or apply only if you meet certain conditions. Once the honeymoon ends, or if you fail to meet the conditions, the savings interest rate can drop dramatically.

Let’s say an investor tucked $10,000 into a savings account earning a 5.46 percent p.a. rate. If interest is calculated daily but paid monthly, after one year the account would be worth around $10,560 assuming no further deposits and no withdrawals.

Now let’s see what happens if the same savings pattern is repeated with an account earning 5.25 percent p.a. though this includes a bonus rate of 1.25 percent that expires on January 31, 2010. After this, the rate reverts to 4.0 percent. At the end of 12 months, our investor’s account would be worth around $10,430.

Alternately our investor could deposit $10,000 into an account that pays 5.25 percent p.a. but only if you tip in additional savings of at least $200 each month. In those months where your deposits dip below this threshold the interest rate falls to 3.25 percent, which is 2 percent lower than the bonus rate.

Our hypothetical investor may initially deposit $10,000 into the account but four months later they are only able to save an extra $100 each month, in which case the rate falls to 3.25 percent on this particular type of account, for the remaining nine months. On this basis our investor would only earn the top rate for nine out of 12 months.

Each of these savings account scenarios offers different features, and that’s something worth considering. Nonetheless each one highlights the importance of understanding any conditions that may impact the rate your money earns.

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This article is over two years old, last updated on December 1, 2009. While RateCity makes best efforts to update every important article regularly, the information in this piece may not be as relevant as it once was. Alternatively, please consider checking recent savings accounts articles.

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