Top high-interest savings accounts and term deposits
After two years of historically low interest rates and relatively meager returns, the long winter for Australian savers appears to be coming to an end as banks begin to lift their interest rates once again.
In fact, a flurry of cash rate hikes from the Reserve Bank have ensured that rather than gently thawing, some savings rates have been rapidly heating up, meaning that the savings landscape has changed substantially in recent months.
Whether you're saving up for a home deposit, building an emergency fund or looking for somewhere relatively safe to park your savings in retirement, the big question then is: which banks are offering the most rewarding places for you to stash your savings at present? Let's take a look at some of the options available.
Best savings accounts
The good news is that since the RBA started lifting interest rates in early May, savings account rates have also started picking up. Well, sort of.
While they are moving in the right direction for savers, an analysis by financial comparison website Mozo has found that savings account rate rises have been well below the lift in the cash rate, suggesting that banks haven't been as diligent at increasing their savings rates as they have at lifting their mortgage rates.
Since May, the average bonus savings rate being tracked in Mozo's database has increased by 62 basis points from 0.54% to 1.16%, while the average base savings interest rate has moved 17 basis points higher from 0.12% to 0.29%.
What is the difference between a bonus rate and a base rate? Bonus rates typically come with requirements such as a minimum monthly deposit or a cap on the amount you can withdraw, whereas a base rate is the interest rate you get no matter what you do.
With that in mind, here's a look at the banks currently offering some of the highest interest rates around on their savings accounts, as well as the difference a rate can have on the amount of interest you earn.
Top term deposits
While banks have largely been sluggish at lifting their savings account rates, the same can't be said for term deposit interest rates. For instance, on 12-month term deposits being tracked in Mozo's database, the average rate has rocketed up by 155 basis points from 0.72% to 2.27% since May.
The change means that while you would have been hard pressed to find any term deposit with a rate higher than 2.00% earlier in the year, there are now an abundance of options above 3.00% depending on how long you're willing to lock in.
As the table below shows, AMP Bank are ahead of the pack at the moment when it comes to offering the highest term deposit rates for terms between one and five years - at least, among those being tracked by Mozo. But it's worth pointing out that the likes of Challenger, Judo Bank and Macquarie are also very competitive on these terms and not too far behind AMP.
As Mozo personal finance expert, Claire Frawley, points out though, while term deposit rates may be more generous than those on savings accounts at present, there is a catch.
"Term deposits are a great option if you are looking for a bigger return on your investment and are happy to lock the sum of money away for a fixed period. The longer you lock your money away, the more interest you can earn.
"Term deposit rates are still increasing, so while you might be tempted to jump in now, it could be better to go with a shorter term or lock away part of your savings."
The flipside of the recent cash rate hikes is that homeowners with a mortgage have been hit by rising home loan rates and steeper repayments. One way to reduce those repayments is by making use of an offset account - if you have one attached to your loan.
That's because every dollar sitting in your offset account reduces the loan amount you'll pay interest on. For example, if you have a loan balance of $600,000 but also have $50,000 in savings, you could put that $50,000 into an offset account which would mean that you would only be charged interest on $550,000.
Frawley explains that, assuming the interest rate on your home loan is greater than the interest rate you're earning with a savings account or term deposit, putting your savings in an offset account is likely to be a more effective use of your savings.
"Apart from additional repayments, an offset account can be one of the most powerful tools for borrowers to reduce the cost of their mortgage.
"While term deposit rates are increasing, in most circumstances, they are not as beneficial as putting the same amount of money into an offset account. Utilising an offset account will also allow you to access your savings at any time."
What about inflation?
As is often the case at the moment, there's an elephant in the room and its name is inflation. Annual inflation is currently sitting at 6.1% and is predicted to hit well above 7% by the end of the year.
The crux of that is that unless you can find a savings account or term deposit with a rate better than that of inflation, you're actually losing out because the purchasing power of your savings will have gone backwards.
So, why would anyone want to put their money in a savings account or term deposit at present as opposed to investing it somewhere offering potentially higher returns?
"Over the past few years, share markets all across the world have experienced volatility," says Frawley. "While investing could see a higher return, it also comes with a higher level of risk. Deposit accounts offer reliable growth for those looking to guarantee an increase on their savings."
The beauty of deposit accounts, which include savings accounts, term deposits and bank-backed offset accounts, is that they also offer a certain level of security. That's because deposits of up to $250,000 per person, per authorised deposit-taking institution are guaranteed by the government under the Financial Claims Scheme.
If you are concerned about the impact of inflation though, you might be interested in finding out how to invest your tax refund to beat soaring inflation or checking out these five ETFs to help inflation-proof your portfolio.
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