Online accounts fudging 'high' interest rates
The average interest rate paid on online savers, once promotional offers are excluded, has slipped to 2.53 per cent, according to financial researchers at Canstar.
Although consumers can get significantly higher "bonus" rates if they make regular contributions or do not make withdrawals, the figures highlight the low "base rates" paid on online saving accounts where people are not benefiting from promotional or bonus offers.
When income taxes and the Medicare levy are taken into account, the analysis found the average online savings rate was paying a return of less than 2 per cent. This compares with the latest inflation rate of 2.2 per cent.
"Any investors who pay tax are going backwards on their cash investments, unless they're earning an above-average return," Canstar's head of product and strategy, Steve Mickenbecker, said.
While banks heavily promote their bonus or promotional rates, the analysis is based on the rates charged once so-called "honeymoon" rates have lapsed.
Each big-four bank has a 3 per cent base rate for online accounts, above the industry average. But for those with a taxable annual income more than $37,000, this is still not likely to be enough to keep up with inflation, the analysis found.
Australians hold $588 billion on deposit with the banks and online savers have been among the fastest growing products in recent years.
But there have recently been signs competition between banks in the deposit market is cooling down, pushing down interest rates.
Managing director of regional lender Bendigo and Adelaide Bank Mike Hirst, last month said he expected interest rates on deposits to fall further this year, because lenders could source funding from lower-cost wholesale markets.
"I would expect that as long as there's continued strength in those wholesale funding markets there will be some abatement around the pricing of retail deposits," he said.
Manager of research at Canstar Chris Groth said that while banks had kept promotional rates high, base rates had fallen because the banks knew few people would move money to chase specials.
Frequently Asked Questions about this Article…
According to Canstar, the average interest rate on online savings accounts (excluding promotional offers) has slipped to 2.53%. That means many everyday savers are getting base rates that are relatively low compared with past promotional highs.
Yes — banks often advertise higher ‘‘bonus’’ or promotional rates, but those typically come with conditions such as regular contributions or no withdrawals. Canstar’s analysis focuses on base rates once those ‘‘honeymoon’’ promotions lapse, which are generally much lower.
When income tax and the Medicare levy are taken into account, the average online savings return falls to less than 2% — below the current inflation rate quoted in the article (2.2%). That means many taxed savers are effectively losing purchasing power on cash holdings.
The article says each of the big-four banks has a base rate of about 3% for online accounts, which is above the industry average. However, for taxpayers with a taxable income above $37,000, even 3% may not be enough to keep up with inflation after tax.
Canstar and bank executives point to cooling competition in the deposit market and lenders’ ability to source cheaper funding from wholesale markets. Bendigo and Adelaide Bank’s managing director, Mike Hirst, said stronger wholesale funding can push retail deposit pricing down further.
The article notes Australians hold about $588 billion on deposit with banks, and online savings products have been among the fastest-growing deposit products in recent years.
Promotional rates can boost returns if you meet the conditions, but Canstar warns they often expire and base rates can be much lower. Investors should compare long‑term base rates and consider after‑tax returns and inflation rather than chasing short‑term specials.
Canstar’s experts highlight that base rates matter more once promotions end, taxes and the Medicare levy reduce real returns, and many savers may be losing purchasing power unless they earn above-average rates. It’s important to check the advertised bonus conditions and the ongoing base rate.
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