Understanding the Low Interest Rates on Savings Accounts

Fact Checked
Updated 06/02/2024
Understanding the Low Interest Rates on Savings Accounts

Banks haven’t been as generous to savers as they have to themselves.

Time to read : 4 Minutes

The RBA’s aggressive stance against inflation has resulted in a 4.25% increase in the cash rate across less than two years - the fastest cycle of rate hikes in our history.

This had a flow-on effect as banks hurried to hike home loan interest rates again, and again, and again… well, thirteen times in eighteen months since May 2022.

Yes, but... banks haven’t been as generous to savers as they have to themselves.

So, how are your savings doing?

You’ve probably already noticed that, while mortgage holders are contemplating giving up cheese, the interest on your savings account seems lower than Lake Eyre.

Well, there’s a reason for this. 

A recent Australian & Competition Consumer Commission (ACCC) report, released last December, noted “the interest rates consumers receive on deposits do not automatically follow movements in the RBA’s cash rate target.”

  • The ACCC report also found that an average of 71% of savings accounts did not receive any additional or bonus interest (despite the way those accounts were promoted), for varying reasons based on conditions the report described as “opaque”.

  • In one case, a specific bank's bonus interest account encourages you to initiate their deposits with $5,000, and contribute $200 a month to potentially earn about $328 in interest over a 12-month period with their bonus interest rate of 5.25%.

Sounds good right?

However, if the bonus interest conditions aren’t met, your interest rate falls to a mere 0.30%.

That comes to just $18 a year, which is far less than you’d get if you’d just dumped your $5K into their unconditional savings account with its uncomplicated interest rate of 3.75% per annum.

That’d give you a yearly interest return of $232, without needing to track another money trail.

So, why haven't savings account interest rates risen like other interest charges?

Well, most of this is due to how banks make their money. Unsurprisingly, they make most of it off of you and me.

The banking industry relies on borrowing money from depositors (that’s us) at a lower interest rate and lending it out to borrowers (that’s mortgage holders - and yes, many of us are both) at a higher rate. 

If there’s ample supply and people are saving more, banks don’t not need to pay you higher interest. Currently, many banks have sufficient capital and are not actively seeking additional deposits.

During the pandemic, banks were literally full of cash. The Australian Prudential and Regulatory Authority (APRA) also adjusted the buffer rate for home loan approvals in late 2020. 

This meant banks had a lower loan-to-deposit ratio to bolster their loan books. With high-value loans secured by less actual debt, and high cash reserves left over from the pandemic, banks had less incentive to raise savings rates to attract your deposits. Put simply, they didn’t need your money.

Good news: this is changing

The RBA's impact on savings accounts tends to receive less scrutiny than its effect on mortgage rates, despite a larger number of savers in the community. 

The value of Australian mortgages is $2.1 trillion, well above the $1.4 trillion held in household bank deposits - and remember that mortgages are debts. Deposits are cash money.

Despite the overall low interest rates on savings accounts, it's worth seeing if there's a saving account that offers you better returns.

It does require a little bit of sleuthing though, as a lot of accounts come with T&Cs and minimum deposits and withdrawals.

For example, Westpac have a savings account offering a 5.2% interest rate and ING have one with 5.5%, but if you don't hit their minimum requirements that drops to 2% and 0.55% respectively, while the less-well known Rabobank have a lower interest rate at 4.4%, but no minimum conditions.

That's just one example. There are a lot of savings accounts out there and it pays to be better informed.

As always, do your sums, compare, and shop around. It's your money, after all.

The bottom line:

  • Banks have been as slow to pass on interest rate rises to savers as they have been lightning-fast to pass through increases to mortgage holders.

  • As inflation decreases, real interest rates on savings accounts are expected to improve because the banks need your dollars more.

  • Increased competition for your deposit monies indicates a positive trend if you’re looking for better returns on your savings.

  • The ACCC recommends shopping around for your savings accounts, just like any other financial product. 

  • Your savings should definitely be working at least as hard as you do.