How you can earn 5% interest on your savings

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Australians have a collective $1.47 trillion tucked away in their savings accounts, term deposits and bank accounts according to the latest figures from the Australian Prudential Regulation Authority.

But are savers getting the kind of returns on their money that they could be?

how to earn 5% on your savings

The landscape has certainly improved for savers in recent years as the cash rate and, in turn, the interest rates being offered by banks have shot up.

As Rachel Wastell, finance expert at comparison website Mozo explains though, competition in the savings market tends to ebb and flow, so the banks offering the highest rates a year ago aren't necessarily still the most competitive today.

"How competitive a bank's rates are can change quickly depending on how much they want new deposit customers, or how important they see the goal of acquiring new deposits, and this shifts over time.

"Just because your account has had great rates in the past also doesn't mean it will stay that way. Many past rate leaders are now offering much less competitive rates. Regularly checking and comparing rates is key to making sure you're always getting the best deal."

So what does a competitive savings account rate look like at present?

"If you're currently earning less than 5% on your savings, now might be the time to start looking for a better deal," Wastell recommends.

Which bank has the highest savings account rate?

The good news for savers is that there are plenty of accounts that hit this mark. In fact, there are currently 30 different accounts on the Mozo database with an ongoing interest rate of 5% or higher.

Some are more competitive than others though. The most competitive being bonus rate accounts which require savers to meet set requirements each month in order to activate the highest rate.

"For those willing to meet bonus conditions attached to the leading bonus rates, the top five accounts on the Mozo database are offering rates around 5.50%," says Wastell.

"The ME HomeME Savings Account is the rate leader with a 5.55% bonus rate, but this does require a minimum $2000 deposit into a connected SpendME account every month and savers need to maintain a higher closing balance than the previous month."

If those conditions aren't met savers will end up earning a much lower 0.55% base rate though.

The set-and-forget alternatives

Having to tick off set conditions every month isn't going to be everyone's cup of tea, and during some months it might not be feasible. But there are options for those looking for a more hands-off approach.

Though they don't come with rates quite as high as the most competitive bonus rate accounts, there are a number of banks offering relatively sharp base interest rates at the moment.

"If you can't commit to rigorous monthly conditions, aiming for a rate above 4.5% is still doable, with the top five base rates above 4.75%," Wastell says.

"And Australian Unity is still boasting a 5.20% base rate which is actually higher than some of the Big Four bonus rates."

Beyond interest rates

Earning a competitive rate is, of course, going to be top priority for many savers. But for those thinking about switching accounts, there may also be other factors worth considering.

One of these, Wastell says, is the range of account tools and features on offer with an account.

"If you're not great at budgeting, don't plan for savings goals or aren't sure where to start, look for savings accounts that offer mobile apps with notifications and automations for saving, such as rounding up purchases, setting savings goals or splitting your funds into different saving and spending buckets.

"These tools can make saving easier and more effective, especially if you're not a diligent saver and need a little help getting started."

For savers who like to split their savings across different buckets or sub-accounts, Wastell does recommend taking a closer look at how the interest is calculated though.

"If you want to have different buckets or funds for different savings goals make sure you're earning interest on all of those. Double check how interest is calculated before leaving your funds in an account or bucket that may not actually end up earning you the highest rate."

Reform on the way

The reality is that a good chunk of savers aren't taking advantage of the relatively high savings rates on the market at present. Even if they have a competitive account.

Late last year the Australian Competition and Consumer Commission (ACCC) released a report on retail deposits which revealed that during the first half of 2023 more than two thirds of savings accounts with a bonus interest rate didn't actually receive the top rate, on average, each month.

That was just one of the findings detailed by the ACCC in its report, which also contained a series of recommendations aimed at helping savers to get the most out of their accounts.

In an announcement last week Treasurer Jim Chalmers confirmed that the federal government would adopt a number of the measures proposed by the regulator, including:

  • Ensuring that customers are better notified about bonus rate offers
  • Making banks alert customers to rate changes on their savings accounts
  • Requiring comparison websites to better disclose how products are ranked and the financial relationships they have with providers
  • Investigating how behavioural economics and prompts can be used to encourage consumers to switch to better value products

While Wastell believes that the reforms will be positive for savers, including those related to comparison websites like Mozo which she says, "align with Mozo's commitment to transparency", she would have liked the government to have gone further.

"One thing I would have loved to have seen in these reforms was an enforcement that required banks to tell their customers each and every time they didn't meet their bonus rate conditions - and the base rate they will earn instead - not just when their savings rate changes.

"According to the ACCC, over 70% of bonus rate savers don't meet bonus rate conditions, which is a huge proportion of Aussies that are probably earning a much lower rate than they realise. And I do think Aussies would be more diligent if they were clearly shown the interest they were missing out on."

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Tom Watson is a senior journalist at Money magazine, and one of the hosts of the Friends With Money podcast. He's previously worked as a journalist covering everything from property and consumer banking to financial technology. Tom has a Bachelor of Communication (Journalism) from the University of Technology, Sydney.