On top of everything else that’s happened in 2020, interest rates on term deposits and savings accounts have been stagnating or declining to record lows over the year. It’s not yet clear when exactly these rates for savers are expected to start rising again.
Why do banks pay interest on savings?
Depositing money with a bank or Authorised Deposit-taking Institution (ADI) isn’t like stuffing your spare change under the mattress. Rather than sitting on your money, the bank or ADI will use your cash to help provide financial services to other customers, such as home loans and credit cards.
When you deposit money with a bank or ADI, you’re effectively letting them borrow your money so they can put it to use. And just like when you take out a loan from a bank, the interest is the cost of borrowing money – except in this case, the bank pays the interest to you, and not the other way around.
This can make a term deposit or savings account function almost like an investment, where you can expect to receive a return on your savings over time.
Why are term deposit interest rates in decline?
There are many factors that affect interest rates on both credit products (e.g. home loans, personal loans, credit cards etc) and deposit products (e.g. term deposits, savings account etc). Among these is the nation’s cash rate, set by the Reserve Bank of Australia (RBA). This is a benchmark interest rate that banks use when accessing cash to help fund the financial services they provide.
The RBA cash rate can serve as a kind of barometer to help forecast interest rate changes from banks and other financial institutions. In the past, when the RBA has cut the cash rate, banks have slashed interest rates for home loans and personal loans, but also for saving accounts and term deposits. And when the RBA has increased the cash rate, home loans and term deposits have often seen interest rates rise accordingly.
The RBA has been gradually reducing the cash rate in recent years, in response to various economic developments. Most recently, the COVID-19 pandemic led to a rare double rate cut in March 2020. While these cuts were intended in part to help Australia’s governments, banks, businesses and citizens more easily borrow the money needed to stay afloat through a recession, it has also meant that savers have been earning less interest on their term deposits.
When will term deposit interest rates start to rise?
The RBA has stated that the cash rate is likely to remain on hold until Australia’s economy hits certain inflation and unemployment targets, which may take years to achieve. There is also speculation that it could drop further in October 2020, from 0.25 per cent to just 0.10 per cent, or even fall into negative interest rates. In either case, it’s likely that term deposit interest rates will likely remain low for the foreseeable future.
However, if Australia’s economy picks up and starts meeting the RBA’s unemployment and inflation targets, the cash rate could start to rise earlier than expected. This could be good news for savers hoping to earn interest on term deposits and savings accounts, though home owners and property investors could find themselves being stung with higher interest rates on their mortgages.
How can you get a higher term deposit interest rate right now?
Term deposits often have several interest rate options available, based on your balance and the term length you choose. Generally, the more money you choose to deposit, and the longer the term you agree to, the higher the rate at which you can earn interest. Some of the highest term deposit interest rates are reserved for higher balances and long terms. For example, a long term deposit of 12 months or more will typically have a higher interest rate than a 6-month term deposit.
Once your term deposit reaches the end of its term, it may automatically roll over into a new term, often one of the same length and with the same interest rate. It’s often worth comparing a few different term deposit options as you approach this stage, as there may be other term deposits available with other banks or ADIs that could offer higher interest rates, or features and benefits that may better suit your financial situation.