Savers feel the pinch of low returns

If your spare cash is earning less than you expected, it might be worth shopping around.

If you haven’t checked the rate you’re earning on your savings account lately, now could be the time to take a closer look. A number of banks have slashed interest rates on savings accounts since 1 July, and your spare cash could be earning less than you think.

The nation’s savers are feeling the pinch with rates on savings falling to dismal lows. The average ongoing return across savings accounts now sits at a miserly 1.82%, and according to comparison site Mozo, there are now only three providers including AMP, RAMS and Australian Unity that offer ongoing rates of 3%.

It puts the onus back on savers to shop around for a better paying savings account, or consider new ways to put spare cash to work.

When it comes to choosing a savings account, read the fine print. Terms vary greatly and so-called bonus saver accounts can come with a variety of conditions to earn the maximum rate – like depositing a minimum amount each month. If you can’t meet the conditions on a regular basis, chances are your money will earn next to nothing.

Sure, it’s possible to switch your money between accounts every few months to continually earn a good introductory rate. But I’m not convinced this is something most of us could keep up on a regular basis. However, there are other ways to use your savings to maximise financial gains.

If you have a home loan, consider using savings to pay more off your mortgage. With home loan rates hovering around 4%, you’ll save more than you would earn in interest on a separate savings account. Most variable rate home loans offer redraw, so you can always claw back the cash if it’s needed in an emergency.

Or think about using an offset home loan, where your mortgage is linked to a separate savings or transaction account. Monthly interest charges are based on the balance of the loan less savings in the linked account. So if you have a loan of $400,000 and $10,000 in the linked account, you’ll only pay interest on a loan of $390,000. Your repayments stay the same, so more of each payment comes off the loan principal. It makes offsets a great way to pay off your loan sooner and still have at-call access to your money.

If you have a credit card debt it can be a no-brainer to use savings to pay down the balance. Even low rate cards can come with interest rates of more than 10% though at the top end of the scale you could be paying 20%-plus. Using savings to clear the balance can really put you ahead financially – especially if you resist the temptation to reload a freshly cleared card with new purchases.


Paul Clitheroe is a founding director of financial planning firm ipac, Chairman of the Australian Government Financial Literacy Board and chief commentator for Money Magazine.

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