After years of the banks fighting it out to lend to households and business owners, it’s your cash that is now a sought-after commodity at banks and credit unions. And the interest rates being paid to get your cash have been climbing steadily.
While this might seem like a good thing, you should be looking very hard at where your money is going, what rate you’re paid and what conditions are attached to your deposit.
The basics of saving are: when you borrow from the bank, you pay an interest rate for the use of their money. When the bank takes money from you, it pays you to use your money in the form of a deposit rate.
The bank lends your cash to a business owner or a home buyer, and they make their profit by paying you less for your cash than they charge the borrowers.
Quite a bit more, actually. Did you know that banks earn, on average, 2.4 per cent more on your deposits than they pay to you? This gap is called the ‘spread’.
And the lower your interest rate, the more the bank makes off your money. Regardless of whether you are getting 4 per cent or 4.5 per cent for your deposits, the bank’s personal loan rate is still 14 per cent.
When you accept a low interest rate, you are helping the banks make bigger profits than if you held out for a higher rate.
When you deposit money, you should ask questions. For example, once the bank has quoted you their deposit rate, ask them what their rate is for wealthy customers, for institutions and ‘private bank’ customers.
You see, it’s not unusual for small savers to be paid a lower interest rate than wealthy customers, on the same savings product.
In this regard, you should know that banks earn the greatest profit from your transaction accounts. Individuals’ and small businesses’ transaction accounts usually earn zero interest, yet the bank uses this money for highly profitable ‘overnight’ money lending. They should be paying you a deposit rate on these accounts.
You should also know how the term deposit game works. A bank pays you a fixed amount for a set time but if official interest rates are rising, it charges the borrower more while your interest rate stays the same. And if you want to get your money out early, the bank charges you a penalty – up to 90 per cent of your interest.
And watch for this: when banks promote high-interest special offers, the promised rate is often for an introductory period before reverting to a much lower rate. There are products where you can be offered 5.75 per cent, but it only lasts for four months, before reverting to 4.75 per cent. Perhaps the biggest decision is how to offset a high deposit rate against convenience of access.
The highest deposit rates you can find involve you being unable to touch the cash for a period of time – as with term deposits – or being charged to take the money out, as with managed funds. Conversely, you find that transaction accounts – that allow you to take money out at will – have either zero, or very low deposit rates.
The best trade-off is the account where you have a term deposit-like rate and on-call access to your money. Some online accelerator accounts work this way.
In the future, keep an eye out for ‘enhanced’ cash management accounts which will pay institutional deposit rates while also allowing easy access to your money.
For now: ensure you have the access to your cash that your lifestyle or business requires; and never be afraid to ask for a better deposit rate.
And one final tip: you don’t have to forgo interest for a ‘deposit guaranteed’ account. The federal government guarantees all deposits at Authorised Deposit-taking Institutions (ADIs), under $250,000.
* Mark Bouris is the Executive Chairman of Yellow Brick Road, a financial services company offering home loans, financial planning, accounting & tax and insurance. Email Mark on mark.neos@ybr.com.au with any queries you may have or check www.ybr.com.au for your nearest branch.