Aim carefully for the top rates
With deposit rates falling, savers should consider their options, writes John Kavanagh.
With deposit rates falling, savers should consider their options, writes John Kavanagh. Australians are about to have their love affair with savings accounts put to the test. Banks and other deposit takers have enjoyed such strong flows into at-call accounts and term deposits that they are no longer chasing retail savings as keenly as they have in the past few years. Instead, they are cutting rates.One-year term-deposit rates have dropped from an average of 5.97 per cent in June to the present level of 5.48 per cent, according to the comparison website InfoChoice. At-call rates have held up better but will fall in line with any move by the Reserve Bank to reduce the official cash rate.Investors looking to counter this trend and do a little better with their savings are considering alternatives such as using their savings to pay off debt or depositing into a mortgage offset, or investing in term deposits within their super funds, where the lower tax rate provides a higher after-tax return.They should also consider a new range of hybrid term deposits on the market, which offer greater diversity of terms and rate structures.At the very least, people need to make sure they review the best rates on offer before rolling over a term deposit or committing new money to a savings account. The Australian Securities and Investments Commission has noted that a significant number of people allow their term deposits to roll over without checking that the new term will provide them with the best rate.What's available?The chief executive of Credit Union Australia, Chris Whitehead, says investors need to consider their needs when making a decision. "People should look for the best rate but they should also be thinking about what access they will need to the money and how certain they want to be that they will get a particular return," he says.The top rate of 6.51 per cent on a high-interest at-call savings account is available from RaboDirect, UBank and Virgin Money. All three come with conditions (two are introductory rates and one requires regular deposits).The highest rate with no strings attached, according to InfoChoice, is 6.31 per cent on Hunter United's Premium Online Investor Account.While the average rate for a 12-month term deposit has dropped to 5.48 per cent, several institutions are offering 5.8 per cent, including Arab Bank, Bankstown City Credit Union, Beirut Hellenic Bank and ING Direct. A number of institutions offer 6 per cent on six-month terms. They include Bank of Cyprus, Bank of Queensland, ING Direct and SGE Credit Union.The chief executive of Teachers Credit Union, Steve James, says term-deposit rates have come down in line with wholesale money-market rates, just as fixed home-loan rates have. He says the lower rates have not had any effect on flows, although he has observed an increase in customers making extra payments on their mortgages.Investment of choiceThe most recent Westpac-Melbourne Institute Index of Consumer Sentiment found 37.8 per cent of people believed bank deposits were the wisest place to put their money. An economist at CommSec, Savanth Sebastian, says that is the highest reading in the survey for 37 years.The Australian Bureau of Statistics reports that at the end of June, money in savings accounts and term deposits represented 22.1 per cent of household assets - above the long-term average of 19.5 per cent.Recent surveys indicate this savings trend will continue. The results of a MasterCard survey of consumer purchasing priorities show saving is a high priority for young people.Fifty five per cent of Australians aged 19 to 29 said they planned to increase their savings in the next six months. People prefer to save for holidays and large purchases, rather than buy them on credit.Other optionsMaking extra mortgage repayments is another form of saving because, by reducing the debt, equity in the home increases. Additional payments go towards the principal amount owing, so reduce the interest calculated each month.One way of looking at extra mortgage payments is that they earn interest at the home-loan interest rate and are free of tax because the asset being accumulated (a family home) is not subject to capital gains tax.For investors prepared to lock their savings away for a long time or are nearing retirement, the idea of using term-deposit options in superannuation funds could make sense. More super funds are offering term deposits this year.The advantage of using a super fund to invest in term deposits is that for many investors, the 15 per cent tax rate on super-fund earnings will be lower than their personal top marginal rate.ANZ put a range of term-deposit products on its wealth management division's investment platform last month. OnePath offers ANZ term deposits ranging from three months to five years on its OneAnswer superannuation and non-superannuation investment platforms.National Australia Bank's online business, UBank, last year launched a term-deposit range aimed at the trustees of self-managed superannuation funds.In April, Commonwealth Bank launched a hybrid term deposit on Colonial First State's FirstChoice platform. The deposit has a maturity date of April 2017, although Colonial has a liquidity facility to allow people to get their money out before the maturity date. The rate is set at 1 per cent over the cash rate.The executive director global capital markets at Westpac, David van Ryn, says the biggest risk term-deposit investors face is reinvestment risk.He says most people invest short-term (up to 90 days) and have money rolling over on a regular basis."What we say to clients is that they need to diversify their term-deposit holdings," he says. "They should have a range of different maturities, they should invest for longer terms."Twelve months ago, Westpac started selling a range called Retirement Deposits. One of the products in the suite, Coupon Select, allows investors to pick terms to 10 years, to pick fixed or floating rates, or a combination of the two, to switch from floating to fixed and to opt for a return of capital with the interest payments.Another product, CPI Plus, offers a fixed base rate (currently 3.5 per cent) and the annual rate of inflation on top of that. If inflation is 3 per cent, CPI Plus will pay 6.5 per cent."Banks are looking to gather deposits from a wider range of sources and you are going to see more of this type of product development," van Ryn says.Where are rates heading?The interest rate futures market, which is a guide to where money-market professionals think rates are heading, has been operating on the basis that there will be a full-blown financial crisis in Europe and the Reserve Bank will respond by cutting rates by one percentage point.Westpac economist Bill Evans has forecast big rate cuts for some time. He predicts the Reserve Bank will reduce the official cash rate from 4.75 per cent to 4.5 per cent in December, then continue cutting until the cash rate reaches 3.75 per cent in September next year.ANZ economist Ivan Colhoun says the Reserve Bank is likely to cut rates next month "as a little insurance against weaker-than-expected growth and higher unemployment. This would be prudent, given global uncertainties and downward revisions to global growth forecasts."