High-interest savings accounts can theoretically turn a stagnant bank balance into a growing one. But how do you find the best rate without the hidden catches?
If you're considering an internet savings account, term deposit or cash management account, follow this guide to find the best place for your money.
Don't accept a low rate
Switching to a better interest rate could save you hundreds of dollars per year. For example, if you park a spare $5000 in an everyday bank account paying just 0.01% annual interest, your money will actually be going backwards after you factor in inflation and any account-keeping and transaction fees. And bad rates like 0.01% (laughable really) are hardly uncommon.
The more you put into the new account, the better off you'll be – to state the obvious. Regular savings plans and direct salary transfers are usually available with internet savings accounts.
Types of accounts
Choosing where to put your money isn't just a matter of picking the account with the highest interest rate. Flexibility, ease of access and account fees are also important considerations.
- Internet savings accounts: Opening an account is straightforward and interest rates are often much better than traditional accounts.
- Term deposits: Interest on the best term deposits is similar to the best internet savings accounts, especially since term deposit rates have been dropping in recent years. Rates are fixed for the term. The drawback is you can't withdraw early without incurring a fee – and with so-called "unbreakable" term deposits you'll have to give 31 days notice to access your money plus pay a substantial break fee. Unbreakable term deposits are becoming the norm across many institutions these days though they're not often advertised as such. Be sure to the read the product disclosure statement (PDS) when considering a term deposit.
- Cash management accounts (CMAs): These 'hybrid' accounts combine higher interest with the ability to do transactions like using ATMs or paying bills. You'll generally need several thousand dollars to open a CMA account.
- Traditional savings accounts: Even when bonus rates are added, the rates on most traditional savings accounts are less than those on term deposits, cash management accounts and internet savings accounts.
Internet savings accounts allow limited transactions – for example, you probably won't be able to make bill payments, EFTPOS transactions and ATM withdrawals directly from your savings account.
To withdraw money you'll have to transfer it back to your linked transaction account, which may take a day or more to process.
That said, the best internet accounts offer real-time transfers these days (from your savings to your transaction account, or back the other way, for instance), and there are plenty of accounts out there that have this capability.
- No minimum opening or ongoing account balance – though some accounts do require a minimum monthly deposit and limit the amount of money you can earn interest on.
- You can withdraw or deposit whatever you like.
- Interest is calculated daily and added to accounts monthly.
- The balance upon which interest is calculated will either be the closing or minimum daily balance held in the account.
- No account-keeping fees.
- Direct credits and debits, where available, are free.
- Restrictions on facilities such as ATM, branch access, cheque, credit card, debit card, EFTPOS, overdraft and mortgage offset.
You'll find these details in the product disclosure statement (PDS) – which is essential reading before you open any account.
Opening an online account is pretty easy. Most of the forms can be done over the web, and you'll have to link the new account to an existing bank account in order to make an initial deposit.
This means sometimes you don't have to complete the 100-point ID check needed to open a bank account in Australia. Have your linked account details and tax file number handy.
Term deposits are available from banks, building societies and credit unions. Interest on the best term deposits is similar to the best internet savings accounts. The key feature is certainty – rates are fixed for the term (so even if the Reserve Bank of Australia changes its rate, your return remains the same).
The drawback is early withdrawals are penalised with a break fee, and many institutions have now introduced "unbreakable" term deposits requiring you to give 31 days notice for early withdrawal – plus pay a hefty penalty. Be sure to check the PDS for this.
Terms can range from three months to several years. Interest is fixed and may be paid and credited to your account monthly, quarterly, semi-annually, or when the term ends. Rates vary depending on the amount, how frequently interest is paid and if it's compounded – compare the annual rates.
- Rates can change at the end of your fixed term. What you sign up for may be attractive, but it may revert to a much lower rate if allowed to roll over or be automatically reinvested when the fixed term expires.
- Read the PDS for full details of the investment.
- Check that the bank, building society or credit union you choose is an authorised deposit-taking institution (ADI). You'll find a list of ADIs at apra.gov.au. Further details are available from asic.gov.au.
Cash management accounts (CMAs) usually pay better interest than everyday transaction accounts, but lower interest than internet savings accounts. The advantage is they are versatile – you can make a broad range of transactions, often fee-free, if you keep a balance of $5000, for example, in the account.
Account-keeping and transaction fees can be waived or rebated with some accounts.
Other accounts give a number of free transactions each month before transaction fees kick in. They often require a minimum balance of several thousand dollars to open the account or get the best rate.
The standard interest rates (without bonuses) on these accounts are low. Even with bonus interest added, the rates are lower than the best term deposits, cash management accounts and internet savings accounts.
There can be restrictions on receiving the bonus interest rates – for example, you may have to make monthly deposits to the account or not withdraw money.
Many internet saving accounts don't have these restrictions, though some do. Once again, be sure to read that PDS!