Online accounts fudging 'high' interest rates

Australians rushing to put their savings in heavily promoted "high interest" online savings accounts may not be getting the interest rate kick they are led to believe by the industry's glossy brochures, with after-tax returns from many online accounts failing to keep up with inflation, new figures show.

Australians rushing to put their savings in heavily promoted "high interest" online savings accounts may not be getting the interest rate kick they are led to believe by the industry's glossy brochures, with after-tax returns from many online accounts failing to keep up with inflation, new figures show.

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.

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