Mortgage rates rising, but savers still getting short-changed by banks

Banks have passed on only a fraction of the rise in official interest rates to savers, at a time of mounting cost of living pressures, including higher mortgage repayments and rents, and low wage growth.

While the Reserve Bank of Australia has increased the cash rate by 2.25 percentage points since May, bonus saver accounts are paying just 1.31 percentage points more in interest, or just over half of the cumulative increase in official rates. Meanwhile, home loan customers have had almost all the cash rate rises passed on.

Savers are missing out on the increases in the cash rate.Credit:Louie Douvis

Figures provided to The Age and The Sydney Morning Herald by Canstar show someone with $10,000 in a typical bonus saver account would earn annual interest of 1.83 per cent. That leaves them with almost $100 less in interest over 12 months than if lenders had passed on the official rate rises in full.

These figures are for bonus savers, where certain conditions have to be met each month for the full interest rate to be paid. If the conditions are not met, a much lower base rate is applied.

Sometimes to earn the bonus, savers are required to deposit a minimum amount of cash into the account each month. If withdrawals are made, sometimes the bonus is not paid.

Other bonus saver accounts have no conditions, but only pay the bonus rate during an initial promotional period, typically four months, after which they revert to a base rate.

It is easy for someone to fail to observe the conditions or to let the introductory period lapse and end up being paid only the basic rate.

Those with money in everyday savings accounts, which usually have no conditions, fare even worse. These accounts are paying just 0.98 per cent, on average, up from 0.18 per cent in April, ahead of the first cash rate increase. That means just over 35 per cent of the total rise in the cash rate has been passed on to everyday savings accounts, compared to 58 per cent for bonus saver accounts.

“If you keep your money in an everyday savings account you are really cutting yourself short,” says Effie Zahos, editor-at-large at Canstar.

The cash rate is not the only determinant of how much interest is paid on saving accounts. Rates are also based on what their competitors are doing.

Cash deposits built-up during the pandemic as consumers spent less, so banks do not need to compete hard to attract deposits, Zahos says.

With interest rates on the rise, savings rates would continue to change, so customers need to be on the lookout for the best deals, Zahos says.

The best bonus savers pay an interest rate of more than 3.5 per cent, provided their conditions are met. By comparison, the best term deposit rate for three months for $10,000 is from Macquarie Bank at 3.05 per cent. Macquarie also has the best rate for nine months at 3.2 per cent, as well as for 12 months at 3.75 per cent.

“Savers should be wary of locking away their money in a term deposit for too long as there are more cash rate rises on the way,” Zahos says.

With mortgage rates on the rise, those with an offset account attached to their mortgage are likely to find that one of the best places to save, she says.

Money placed in an offset account reduces your mortgage and the amount of interest paid. The average variable interest rate for owner-occupiers paying principal and interest is 4.74 per cent, Canstar figures show. That is the advertised rate, but most people pay less than that.

Economists at the big banks have differing views on where interest rates will end up, although they are universally expected to keep on rising.

Predictions range from a peak of between 2.85 per cent to 3.35 per cent, sometime between November this year and February next year.

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