Online savings accounts lose their high interest lure
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.
Frequently Asked Questions about this Article…
Canstar's analysis shows the average interest rate on online savings accounts, once promotional offers are excluded, has fallen to about 2.53%. After income tax and the Medicare levy are taken into account, the typical after‑tax return on those accounts is under 2%.
Not generally. The latest inflation rate cited in the article is 2.2%, while the average after‑tax return from many online savings accounts is below 2%, meaning many taxed savers are losing purchasing power unless they earn an above‑average return.
Banks often advertise generous bonus or promotional rates, but those are conditional (for example, requiring regular contributions or no withdrawals) and temporary. Canstar's analysis focuses on base rates after those 'honeymoon' offers lapse, which are substantially lower than many advertised specials.
The base rate is the standard interest a bank pays outside promotional or bonus conditions. Bonus rates are higher, conditional and often temporary; if you don't meet the conditions or the promotion ends, you receive the lower base rate instead.
Each of the big four banks has a base online savings rate of about 3%, which is higher than the industry average. However, for people with a taxable income above $37,000 a year, even that base rate may not be enough to keep pace with inflation once tax and the Medicare levy are applied.
The article says competition for deposits has cooled and banks can access lower‑cost funding in wholesale markets. Bendigo and Adelaide Bank's managing director Mike Hirst expects deposit rates to fall as lenders tap cheaper wholesale funding, and Canstar's research manager Chris Groth adds banks know many customers won't move their money to chase specials, reducing pressure to keep base rates high.
Consumers hold about $588 billion on deposit with Australia's banks, and online savings accounts have been among the fastest‑growing deposit products in recent years, even as competition on rates has cooled.
Check the account's base rate (not just promotional bonuses), factor in tax and the Medicare levy to estimate your after‑tax return, and compare that return to inflation. If you're a taxed investor and the after‑tax return is lower than inflation, you could be losing purchasing power unless you can consistently earn an above‑average rate.
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