Publicised savings rates can be deceptive
Recently, however, there's been a changing of the guard. As people do more of their banking on the internet, banks are increasing the interest rates on online "bonus saver" accounts as a way to shore up their funding.
In 2009, the average bonus saver account interest rate was about 50 basis points lower than the cash rate. Today the average bonus rate is about 100 basis points higher than the official rate - while the best rates are about 200 basis points higher.
And as this week's graph shows, the average online "bonus" account offered by the majors has overtaken the three-month-term deposit "specials".
This rise of bonus savers has plenty of advantages - especially if you're reluctant to lock away your money in a term deposit. But, as always, there are also catches.
Most of the time, banks only pay the "bonus" rate of interest if you don't make any withdrawals, and sometimes you need to make a minimum regular contribution to the account as well.
Banks also make a big effort to market their "honeymoon" interest rates in glossy brochures, but these rates often lapse after a limited time, or they apply to new customers only.
If you don't qualify for the bonus rate, or the honeymoon period expires, you'll generally receive a much lower "base" rate.
According to the financial research firm Canstar, the average rate paid on online savings accounts has slipped to only 2.53 per cent over the past few months.
Why do the banks pay you so much less if you don't meet their bonus conditions?
For one, new rules mean they put a higher price on money that is "sticky", or won't be suddenly withdrawn. A few banks have even launched products that require you to give a month's notice for withdrawals.
But there is also an obvious reason why these base rates are so much lower than the more publicised promotional rates: consumer inertia.
The banks realise that many people can't be bothered constantly reassessing what's available and moving their money somewhere more attractive when promotional offers expire.
It's also much cheaper for banks to offer the most competitive rates to new customers who switch - rather than the billions in deposit accounts they already have on their books.
So even though promotional rates grab the most publicity, it's likely many people are actually receiving much lower returns.
This may all sound terribly obvious, but whether or not you qualify for the full bonus rate can make a big difference to whether you're really saving or slowly having your money eroded by inflation.
Canstar's research showed that after tax and the Medicare levy was taken into account, the average base online savings account returned just 2 per cent - which is lower than inflation.
Frequently Asked Questions about this Article…
A bonus saver account is an online savings product that pays a higher, promotional "bonus" interest rate if you meet certain conditions (for example, no withdrawals or regular deposits). Banks have been boosting these online bonus rates as a cheaper way to attract and keep internet banking customers and shore up funding. According to the article, the average bonus rate today sits about 100 basis points above the official cash rate, with the best offers around 200 basis points higher.
They can be — especially if you don’t want to lock your money away. The article notes the average online bonus account offered by the major banks has even overtaken three‑month term deposit specials. But bonus savers come with conditions and potential downsides, so the better option depends on whether you can meet those conditions and how long you want your money to be tied up.
Typical conditions include making no withdrawals during the interest period, making a minimum regular deposit, or being a new customer. Some products even require giving a month’s notice before withdrawing. If you don’t meet the bonus conditions, you usually fall back to a much lower base rate.
Canstar’s research cited in the article shows the average rate paid on online savings accounts has recently slipped to about 2.53 per cent. When the average base rate is adjusted for tax and the Medicare levy, the article says the return falls to roughly 2 per cent — which is lower than inflation.
There are a few reasons given in the article: banks place a higher value on "sticky" deposits that aren’t likely to be withdrawn, they can require notice periods for withdrawals, and they find it cheaper to offer competitive rates to attract new customers rather than raise rates across billions of existing deposit accounts. Consumer inertia — people not bothering to move money when promos expire — also lets banks keep base rates low.
A "honeymoon" rate is a temporary promotional interest rate heavily marketed to attract customers. The article warns these rates often lapse after a limited time or are available only to new customers. If the honeymoon period ends and you don’t qualify for the bonus, you’ll typically receive the much lower base rate.
Yes. Although promotional rates get the most publicity, many people end up receiving much lower returns because they don’t meet bonus conditions or the promo period expires. The article highlights consumer inertia as a key reason — many savers don’t constantly reassess offers, so they may miss out when higher promotional rates lapse.
Qualifying for the full bonus rate can make a significant difference to your real returns, but it doesn’t automatically protect you from inflation. The article points out that the average base online savings return, after tax and the Medicare levy, was about 2 per cent — lower than inflation — so if you lose the bonus or never qualify for it, your savings may still be eroded by inflation.
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