Are you a saver? This is what the cash rate increase means to you

Are you one of the many savers who cheer when interest rates start to rise?

For years, record low interest rates meant anyone with money in the bank got little or no interest.

The Reserve Bank this week raised the official interest rate by 0.5 percentage point, its third increase in as many months.

If you’re having trouble paying the higher interest rates on your mortgage, we’re here to help.

But if you’re a saver (and don’t want to invest), here are three options for parking your money.

First, what will happen to the interest rate on my savings account?

Depends.

The official cash rate has gone up, but that doesn’t mean everyone will earn more interest on their savings.

It is up to individual lenders to decide how much of the Reserve Bank’s rate hikes to pass on to savers (and mortgage borrowers).

Some lenders have already started going through the July hikes.

In June, the big four banks were slow to pass rate hikes to their savings accounts and not all continued the hike in full.

So it’s worth checking with your lender to see if you’ll get a higher rate.

That’s because it’s not just the official cash rate that affects the rate lenders offer customers, explains the Australian Banking Association.

It also says about the available demand or supply of different types of funding.

“Broadly speaking, not all bank funding comes from deposits but is taken from various sources including domestic and international investors,” said a spokesman.

Interestingly, the Reserve Bank’s latest data shows about 60 percent of bank funding comes from deposits.

Now is the right time to shop

The rates offered by dozens of different lenders in the market vary widely.

But if you’re looking to make the switch, don’t be fooled by the rates advertised on bonus savings accounts, says Laura Higgins of Moneysmart ASIC.

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Many lenders offer a small base rate, with bonus interest if you meet certain criteria (such as depositing a certain amount each month or making a number of card transactions per month, or not withdrawing money).

And if you don’t comply with these terms (which can be hard to track down), you usually don’t get a higher interest rate that month.

“If you don’t meet the requirements, then you may be better off looking at other options to increase your savings,” Ms Higgins said.

There are better places to park your money than a cash box(ABC News: Daniel Irvine)

So, where else can I park my money?

Another option is time deposits.

In general, they offer higher rates than savings accounts.

“Future deposits are a low-risk way to invest your money and earn a fixed rate of interest,” says Higgins.

“They lock up your money for a period of time, usually between one month and five years.”

But be aware that if you need to access the money early, there is usually a large fee to terminate the contract.

Ways to cut living costs

So, like fixing your mortgage, locking in the savings rate is also a gamble.

Professor of Finance at the University of Sydney, Susan Thorp, says it’s worth asking yourself three questions before you decide whether to park your money in a time deposit:

1. Will I probably need this money in a short time?

2. How important is it for me to lock in a safe rate of return, rather than getting the highest rate?

3. Am I less likely to spend on a time deposit than I am to have money in an offset account?

Good point. What about offset accounts?

You might also consider using an offset account if you have a variable mortgage, says Ms Higgins.

You can still access cash when you need it, but simply keeping the money there reduces the amount of interest you pay on your mortgage.

(For example, if you have a $600,000 loan and $20,000 in your offset account, you pay $580,000 in interest).

There is usually no additional cost to having an offset account and you can have multiple offset accounts if that’s what you want to budget for.

(Not to be confused with redrawing though. It involves accessing additional payments you made on your home loan and has certain limitations and possibly fees).

“In contrast, and setting aside the need for certainty or initial commitment, most mortgage offset accounts for homeowners exceed the rate of return on time deposits,” explains Professor Thorp.

It just means you may get more value by keeping your money in your offset account than what interest you would pay on any savings.

Just remember, this is all general information. You should do what’s best for your personal situation and get advice if you need it.

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