Savings.com.au takes an in-depth look at how interest rates on savings accounts and term deposits have changed.
When you send part of your regular salary into a savings account, or lock a good portion away in a term deposit, you’re pretty much guaranteed to earn at least a little interest on this money. These products are seen as much ‘safer’ options than investing it in, say, shares, which can generate greater returns at the cost of increased risk.
Because of their relative safety (and other external factors, which we’ll explore later), savings accounts and term deposits don’t provide returns as fruitful as they once did. In fact, the current average interest rates on both are at near-historic lows. Let’s take a look at what the rates currently are, what they used to be and what they can be down the line.
Current interest rates
There’s little to cheer about when it comes to interest rates on savings accounts and term deposits at the moment.
Savings account interest rates
At the time of writing (December 2018), the highest total interest rate on the market is 3.10% p.a. – that includes the bonus interest. When you take away any bonus interest rates that might be included, then the average savings account interest rate right now is a mere 1.52% p.a. Two years ago in 2016, this average was closer to 2% p.a., so it appears savings accounts have quite drastically lowered their interest rates in recent years.
That’s not to say you have to accept an interest rate this low – as at December 2018, there are 35 savings accounts on the market offering 2.50% p.a. or more.
Some of these accounts only have higher interest rates for a limited time (usually three or four months) so in reality, your long-term savings account options are even more limited if high interest is what you’re after. These interest rates can also change at any time.
Term deposit interest rates
Term deposit rates don’t fare much better. According to the RBA’s Retail Deposit and Investment Rates data, the average interest rates from Australia’s five largest banks are:
- One month: 1.40% p.a.
- Three months: 1.90% p.a.
- Six months: 2.00% p.a.
- One year: 2.20% p.a.
- Three years: 2.45% p.a.
Term deposit interest rates offer a bit more variety than savings accounts – you can see that your average interest rate increases with a longer term, while you can earn slightly more in interest depending on how often interest is paid.
Your choice of provider also has a big impact, as it does with savings accounts. Smaller lenders tend to offer higher interest rates than the big boys, with the highest at the moment being higher than 3.00% p.a.
Unlike savings accounts, however, term deposits offer a fixed rate. Where providers can lower savings account interest rates as they please, or offer a higher rate for a limited period of time, term deposit interest rates are locked in for the duration of your term.
Historical savings account and term deposit interest rates
If it’s any comfort at all, previous users of term deposits and savings accounts were able to enjoy higher rates!
Have a look at the infographic below to see how the average interest rates for both bonus savings accounts and term deposits with the five largest banks have changed since 2002 – this is as far back the RBA has collected data for both.
You can see a sharp decline recently in both savings accounts and term deposits in post-GFC Australia. Where rates used to be as high as 5.45% p.a. on savings accounts and 6.20% p.a. on term deposits, they now sit at barely 2.00% p.a. Not shown in this graph is how high term deposits were way back in the day. According to the RBA’s data, you could get an interest rate of 16% on a one-year term deposit in 1989.
Why are rates so low now?
There are a number of reasons why overall interest rates on both savings accounts and term deposits are at historical lows, but the biggest by far is the fact that our cash rate is at a record low of 1.50%, and has been so for a record 26-months straight.
The cash rate is set every month by the Reserve bank of Australia and is a reflection of the overall strength of our economy. The cash rate is the base interest rate that banks charge each other for loans to manage their day-to-day cash needs – a low cash rate means it’s cheaper for banks to borrow from each other and the RBA, resulting in lower interest rates all around.
The infographic below shows the relationship between the cash rate and savings rates. Both savings accounts and term deposits almost follow the exact path the cash rate takes.
Remember that while savings and term deposit rates are low right now, so too are home loan rates.
Be mindful of inflation
One of the principal reasons for adjusting or maintaining the cash rate is to control inflation. Inflation is the rate at which goods and services increase in price over a period of time. If inflation gets too high, the purchasing power of a nation’s currency falls, as does the overall wealth of its citizens.
Australia’s inflation rate over the years…
The RBA has set an inflation target of 2-3% since the early 90’s, and it currently sits at 1.9%.
Inflation represents a problem for savings account and term deposit users at the moment because it has the potential to completely cancel out your earnings. Say you’re sitting on that bang average 1.52% p.a. mark for your savings account. At a 1.9% rate of inflation, you wouldn’t actually earn any interest on your savings account – you’ve actually lost money compared to what the Australian dollar is now worth. If you’re sitting pretty at 3.00% p.a., your real rate of return (adjusted for inflation) is a mere 1.1% p.a.
So savings accounts and term deposits offer pretty dismal returns these days, even in the best-case scenario. If you want to earn more bang for your buck, you can consider alternative options.
How do savings accounts and term deposits compare to other investment options?
If you don’t mind taking on a bit more risk, you can consider investing in either equities (shares), property or bonds. According to the 2018 Long-Term Investing Report by Russell Investments/ASX, over the 10 years until December 2017:
- Shares averaged returns of 4.00% p.a. (bear in mind this encompassed the GFC!)
- Investment properties averaged returns of 8.00% p.a.
- Bonds averaged returns of 6.20% p.a.
Of course, these figures are just an average. Returns on shares can vary wildly; those who invested in Afterpay Touch (APT) over September 2017-2018 would have made a tidy near-290% return on their investment. On the other hand, the worst performing stock Retail Food Group (RFG) dipped a nightmarish -64.8%.
Property meanwhile returned slightly more on average, but is harder for the average investor to get into and could be set to change soon. CoreLogic reported that Australian home prices have fallen for 12 consecutive months in October, with Sydney and Melbourne (40% of all homes in Australia) falling by -4.4% and -4.1% respectively.
With savings accounts and term deposits, you’re at least nearly guaranteed to get something out of it. Other options have higher highs but much lower lows – think about what you can afford to lose!
Important: if your provider is an ADI (authorised deposit-taking institution), and they should be if you have either of these products with them, then you are covered by the Federal Government for up to $250,000 of your deposit. Here is a list of ADIs in Australia.
How to get the best interest rate on your savings account or term deposit
There isn’t much you can do to get a better term deposit interest rate apart from looking around for the highest one – what you see is pretty much what you get.
For savings accounts, at the moment it’s about getting the best of a bad bunch, but you can still get a decent interest rate if you do your research. Most of the savings accounts offering ‘high’ interest rates will have bonus conditions you need to meet. These can be anything, such as:
- Requiring at least $X deposited every week or month
- Requiring a linked transaction account
- Requiring at least X number of transactions to be made with your linked transaction account
- Requiring no withdrawals to be made
If a bank account is offering an extra 1% interest for merely linking a transaction account then that’s a pretty simple way to unlock higher interest, and you shouldn’t really be withdrawing from them too often anyway. Be mindful of bonus interest rates that are only for a limited time – there isn’t really much point to having a decent interest rate for just a few months unless you don’t mind switching often.
Pro tip: if you ring your bank and say you’re switching, they might offer you an interest rate increase. There are limits to what they can offer, but this could give you a very competitive rate indeed.
Are rates set to rise soon?
Only the banks themselves will be able to tell you that. There are movements all the time, both up and down, for savings accounts as well as term deposits, but most of these moves are minor at best. Unless there’s an increase in the cash rate, it’s unlikely that we’ll see any major changes in interest rates anytime soon.
How much could you earn in interest?
Savings accounts and term deposits still have the potential to earn you a fair bit in interest. It’ll just require a bit of patience on your behalf.
Let’s look at an example below. Three hypothetical savers here have $10,000 in current savings, and deposit $500 from their salary every month. But, each of them has a different savings account with a different interest rate…
|Total interest (year 1)||Total interest (year 2)||Total interest (year 3)||Total interest (year 4)||Total interest (year 5)|
|Saver 1: 1.50% p.a.||$150||$392||$728||$1,159||$1,686|
|Saver 2: 2.00% p.a.||$200||$524||$974||$1,554||$2,265|
|Saver 3: 3.00% p.a.||$300||$789||$1,473||$2,357||$3,448|
Calculations: MoneySmart’s compound interest calculator. Compounded annually, figures not adjusted for inflation.
So after five years at 3.00% p.a., you’d have generated nearly $3,500 in interest, assuming you make regular monthly contributions. By not contributing anything to your savings account aside from the initial $10,000, your final interest tally would be a smidge under $1,600 – less than half.
A $10,000 term deposit meanwhile, invested for one year at a 3.00% p.a. interest rate, would generate $300 in interest by the end of the term. A $50,000 term deposit would return $1,500 in interest. Remember, you can’t add to a term deposit like you can with your savings account, so the interest you’ll earn is much more straightforward.
These returns are nothing to be scoffed at, but they assume you’re on one of the highest interest rates available. If not, then your returns will be lower.
Savings.com.au’s two cents
Interest rates on savings accounts and term deposits aren’t high. This is because, in essence, they are the most basic investment product: low risk = low reward.
In the case of term deposits, you’re nearly guaranteed a rate of return on your investment unless the bank collapses and you have less than $250,000 deposited. Savings accounts also represent a lower risk, and as such your interest rate will be pretty low. But that doesn’t make them worthless.
Savings accounts make for a great tool for building savings habits: you can set up automatic transfers weekly, fortnightly or monthly to selected accounts which can take a lot of the admin away from you, and some banks like ING have roundup tools on their apps which automatically send money to your savings account after every transaction. A lot of people prefer to simply make one transfer to their savings account every payday to force themselves to save – how much to transfer is up to you.
If serious, big-money returns are what you’re after though, you might have to look to higher risk investment assets such as shares, bonds or property.