Online savings accounts lose their high interest lure

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 receive 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 of the big four banks has a base rate of 3 per cent for their online accounts, higher than the industry average. But for people with a taxable income of more than $37,000 a year, this is still not likely to be enough to keep up with inflation, the analysis found.

Consumers hold $588 billion on deposit with Australia's banks and online savers have been some of the fastest-growing products in recent years. But there have been signs competition between banks in the deposit market is cooling down, pushing down interest rates.

The 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 were able to source their funding from lower-cost wholesale markets.

"I would expect that as long as there is continued strength in those wholesale funding markets there will be some abatement around the pricing of retail deposits," Mr Hirst said.

The manager of research at Canstar, Chris Groth, said that while banks had kept their promotional rates high, base rates had fallen substantially because the banks knew many people would not move their money to chase specials.

"We are certainly not seeing the same level of competition in that space as we had in the past. It's gone a little bit off the boil," he said.

Related Articles