Where to find the best cash rates

PORTFOLIO POINT: Market-shy investors keen to preserve their cash should look to credit unions and online accounts for the best rates.
Battered and bruised from one of the worst years ever on the Australian sharemarket, it’s time to take a fresh look at the most attractive places to place your cash.

Cash seemed a great place to be in 2008, with online savings accounts offering up to 8.5% interest proving an attractive alternative to a market that lost 41% over the course of the year.

But as the central bank started cutting rates in September, cash started losing its safe haven status, and at the start of 2009 cash rates are continuing to decline, running at 4–5%.

At these levels rates are not much above inflation (currently 5%, for the 12 months to September 2008) but with uncertainty over how the sharemarket and economy will fare this year, and the government guarantee on deposits, cash still offers a safe option for investors focused on wealth preservation.

Speaking of the government guarantee, you’ll notice credit unions are offering attractive interest rates in a bid to shore up their balance sheets and lure customers away from the Big Four banks.

For most investors the key choice is between “at call” accounts, from which money is available at any time and “term deposit”, which lock up money for set periods.

Here’s what looks good for at-call savings account as at January 8.

nTop five interest-paying savings accounts as January 8
Institution	Product name	Minimum open	Account balance up to $10,000	Monthly interest	Interest paid
La Trobe Financial	Cash & Mortgages	$1,000	6.75%	$56.25	Monthly
Arab Bank Australia	Online Savings Account	$1	6.70%	$55.83	Monthly
Bank of Queensland	WebSavings Account (Intro rate until 31/3)	$1	6.20%	$51.67	Monthly
FCCS Credit Union	Online Saver Account	$1	6%	$50	Monthly
One Direct	High Interest Saver		6%	$50	Monthly
Source: InfoChoice

(The figures are for a savings amount of $10,000, and contain both standard and online accounts)

AMP’s eASYCash Management is next, offering an interest rate of 5.85%, followed by Elders Rural Bank ERBonline Savings and St George directsaver from dragondirect (promo rate for new customers) at 5.75% each.

The big banks are further down the list: the NAB iSaver offers 5.25%, the ANZ OnlineSaver 5%, whereas St. George has quite a few accounts paying 4.75%.

BankWest, swallowed by Commonwealth Bank last year and traditionally one group that has paid high interest levels, is offering 5.25% on its Telenet saver account; while the CommSec Investment Account pays 4.75%. ING Direct Savings Maximiser, another traditionally high interest product, offers 4.75%.

Adam Rigby, chief operating officer of InfoChoice, says online savings accounts, or high interest saver accounts, have been outperforming term deposits.

“I certainly think you’d be unwise to ignore online high-savings accounts and just look at term deposits, because unless it’s an unusual case where you’re dealing with very large sums of money, for your average person – whether that’s $20,000–30,000 or even $200,000–300,000; often an online saver or a high-interest saver outperforms a TD [term deposits] at the moment,” he says.

"There are a lot of promotional rates available, where they’ll bump the rate by 50 basis points for a period between a month to six months, so they’re often very good.”

He sees “no evidence” that banks will work to make term deposits more attractive, with banks promoting high interest savings and online savings at present, rather than term deposits.

But for those interested in a 90-day term deposit of $10,000, Elders is a good place to start.

nTop five interest-paying term deposits as January 8
Institution	Product name	Minimum open	Interest for 90 days	Interest for 180 days	Monthly interest
Elders Rural Bank	ERBonline Term Deposit		5.75%	5.15%	$48.15
Capricornia Credit Union	Term deposit	$5,000	5.65%	4.15%	$47.31
Elders Rural Bank	Term deposit	$10,000	5.60%	4.25%	$46.88
IMB Banking & Financial Services	Term deposit	$5,000	5.60%	5%	$46.88
Newcastle Permanent	Term deposit	$5,000	5.60%	4.50%	$46.88
Source: InfoChoice

Little-known CUA, Heritage Building Society, Queenslanders Credit Union and Arab Bank Australia offer 5.5% and above.

Of well-known financial institutions, Suncorp’s flexiRates (online) Suncorp eOptions offers 5.55% and BankWest’s tddirect (online) and Gold Term Deposit offering 5.5%. UBank, which is backed by the National Australia Bank, offers an interest rate of 5.51%.

ING Direct Term Deposit (online) comes in at 5.5%, as does Macquarie Group’s Macquarie Bank Term Deposit. ANZ Term Deposit pays 5.4%; while Adelaide Banks Flexiterm and Bendigo Bank’s Term Deposits give 5.3%. Commonwealth Bank of Australia’s Term Deposit offers 4.8%.

It is no surprise that the Big Four’s rates are lower than those of smaller institutions: non-bank lenders are disappearing with the demise of the securitised mortgage market, and the deposit guarantee effectively gives the big banks the federal government’s AAA rating, ensuring their dominance of the Australian banking scene.

Rigby says although InfoChoice would love to see the large banks offer as competitive rates as possible, in some case he suspects “they feel don’t have to”.

However, he adds that the Big Four also operate what are generally referred to “online brands”, such as ANZ’s one direct and NAB’s UBank, which are generally more aggressive.

Rigby says he doesn’t know whether the government guarantee on bank deposits will improve deposit-taking in the long term, but says he has notes anecdotal evidence that it has stopped people taking money out of second-tier or international banks.

Rigby says it’s hard to know whether interest rates will be higher or lower in one year, but in the next few months, along with almost everyone else in the banking market he expects to see “a couple” of rate decreases, which means consumers should keep an eye on their case to ensure they’re getting the best deal possible. (Many economists expect official cash rates to fall from the current 4.25% to as low as 3.5%.)

“But cash is always going to be a safe haven, particularly with the guarantee up to a $1 million. It’s hard to argue with that.”