How could a cash rate cut affect your savings?

How could a cash rate cut affect your savings?

Speculation is building that the Reserve Bank of Australia (RBA) may soon cut the nation’s cash rate for the first time in years. While many home owners and property investors may welcome this news, what effect would a rate cut have on Australians keeping their wealth in savings accounts or term deposits?

What is the cash rate?

The cash rate is the rate at which interest is charged on overnight loans between banks in Australia. Because banks use these overnight loans to provide money and services to their customers, the cash rate directly affects their cost of doing business.

Because the cash rate serves as something of a de-facto benchmark for interest rates around Australia, the RBA’s meetings to decide the cash rate’s future often attract a great deal of interest.  

What does the cash rate mean for interest rates?

While there are many different factors that affect bank interest rates, it’s common for Australia’s cash rate to impact them significantly. When the RBA cuts the cash rate, sooner or later most banks will pass this cut on by slashing their own interest rates. And if the RBA raises the cash rate, banks will often follow suit with a rate hike in the future.

Australians with mortgages, personal loans or car loans often welcome cash rate cuts, as these often mean paying less interest on loans when the bank passes on the rate cut. On the other hand, increases to the cash rate can push interest rates higher, making interest charges on loan repayments cost more.

However, low interest rates aren’t always welcomed by everybody. The cash rate not only affects the interest rates that banks charge on loans, but also the interest rates that banks offer on savings accounts and term deposits. A rate cut could mean many Australians earn less interest from their savings, and grow their wealth more slowly.

How could a rate cut affect term deposits?

A term deposit is an agreement to deposit a sum on money in a bank for a predetermined length of time, earning you interest on these savings. Generally, the more money you agree to deposit, and the longer the term you agree to save it for, the higher the rate of interest you can earn.

If you currently have money saved in a term deposit, very little should immediately change for you if the RBA cuts rates. Term deposits have fixed interest rates – the interest rate you sign up for at the start of the term will still be the same at the end of the term, no matter what the RBA or your bank does.

That said, if you choose to roll over your deposit once its term comes to an end, you may not get the same interest rate a second time if your lender has changed its rates in the interim. If your term deposit’s rollover date is coming up, it may be worth checking what rates your bank is currently offering, and comparing these to options from other financial providers. 

How could a rate cut affect savings accounts?

Keeping your money in a savings account is a relatively simple way to slowly grow your wealth. Savings accounts allow you to earn interest on the money you deposit, with some saving accounts offering higher bonus interest rates to people who fulfil certain terms and conditions, such as regularly topping up their accounts with additional savings.

If you currently have money in a savings account, things could change for you if the RBA cuts the cash rate. It’s possible that your bank may pass on this cut and reduce its variable interest rates, including the earn rates on its savings accounts. Depending on your circumstances, this could lead to you earning less interest on your savings and growing your wealth more slowly.

If you’re not sure whether your bank will be changing its interest rates, contact them to find out. Comparing alternative savings account offers from other banks may let you enjoy better rates, lower fees, or more features that suit your needs.  

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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.

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.

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 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.

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.

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 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.

Should I open a Commonwealth locked savings account?

If you have trouble saving money, a Commbank locked savings account could be a potential solution. A locked savings account won’t let you make withdrawals and as such, it can help you grow your savings balance if you keep topping it up. 

The Commonwealth locked savings account advertises high-interest rates and minimal maintenance fees, along with a host of other incentives that will encourage you not to touch the money. 

The account offers a higher interest rate for each month that you make limited or no withdrawals, as well as regular deposits. 

To qualify for a Commonwealth locked savings account with the advertised features, you will need to fulfil specific criteria such as:

  • Depositing a fixed minimum amount into the account every month.
  • Making a fixed number of deposits each month.
  • Making a minimum or no withdrawals each month.
  • Maintaining a minimum account balance.

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 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.

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.