When the Reserve Bank was in a cycle of cutting interest rates down to the record low of 0.10%, RBA Governor Philip Lowe often admitted that he was receiving a flood of letters from people complaining about low saving deposit rates at banks.
Now that the RBA is raising rates, those letters have probably slowed to a trickle and the RBA Governor is likely to be getting letters from financially stressed homeowners complaining about their rising mortgage payments.
One of the potential positives in the rising interest rate policy is that savers are being rewarded again at the bank. With rates on the rise, you can get as much as 4% interest on your savings with some providers, the highest in years.
In the last 12 months deposit interest rates have almost doubled. If you had $50,000 a year ago and had that in the highest interest bearing deposit account, you would have received $679 in interest for the year. Today, that is a much more attractive $1151.
ING Australia will increase its savings maximiser account deposit rate by 0.45 of a percentage point to 4.05 per cent per annum from October 11 for balances up to $100,000, a rate three times higher than it was six months ago.
Macquarie is offering new customers four per cent for the first four months on balances up to $250,000 and its ongoing rate, which increased by 0.45 of a percentage point to 3.2 per cent and its one-year term deposit rate of 3.8 per cent.
Based on the RBA Governor’s comments this week, interest rates are likely to keep rising for a while longer.
This means that anyone who wants to take advantage of the higher savings rates shouldn’t lock their money away right now for the current rates on offer. Waiting a few months might see higher rates on offer. They might not go close to 10% as they did in 2009, but it is possible to imagine deposit rates of 5% in the near future and for many people that will be very attractive.
The other positive about higher deposit rates is that cash becomes an attractive defensive option while other assets are on the way down.
If, for example, you had a good deposit saved to purchase a house, it could make sense to put those funds away at reasonable interest for a period while housing prices drop.
Imagine if you had $300,000 saved for a home deposit, and were receiving interest of 4%.
At the end of a year you’d have $312,000 and during that time the house you were looking to buy may have fallen by as much as 10% in value, which is how far some experts believe the property market will fall.
The end result would be a smaller mortgage, and while it is true that the interest rate on that mortgage might be higher most homebuyers are comfortable with a smaller housing debt to the bank.
Back during the Global Financial Crisis of 2009, the RBA had official interest rates at above 7%.
With the financial system in crisis, banks were desperate for depositor funds and some were offering close to 10% on savings deposits, which at that time were as attractive as returns from well performed superannuation funds.
Rates may not go as high in this cycle, but at least there is now some upside for savers and an alternative strategy for those who want to keep their money safe, and watch it grow at the same time.
Here’s why you should start saving again – courtesy of Mojo.com.au