5 ways for savers to make the most of rising rates

When interest rates rise, it can be bad news for mortgage-holders, but good news for savers. The Reserve Bank of Australia (RBA) has already hiked rates twice this year, and at least one further rate rise is looking likely.

With the cost of living continuing to bite, you might well be thinking about ways you can pump up the returns from your savings. Here are five strategies you could consider as rates rise.

1. Choose an account that matches your goals

There’s no one ‘right’ savings account for everyone, so a suitable one for you will depend on your needs and goals. Think about whether you want to:

• Grow a lump sum long term: Do you have a large sum, like the proceeds of a property sale or an inheritance? If you want to put this money aside to grow your balance long term, it can pay to look for an account with a high ongoing interest rate, rather than one with a conditional rate that’s earned by depositing a certain amount each month.

• Access higher rates with a bonus saver: Are you planning to contribute to your savings regularly? If a house deposit or a new car is on your wishlist you might put money towards your goal every payday. Some high interest savings accounts reward regular contributors with higher bonus rates. However, these often come with strict conditions that must be met each month, or else you may be left with little to no interest.

• Take advantage of promotional rates: If you’re confident with moving your money around, you could take advantage of high introductory rates, which usually only last for a few months before reverting to a lower rate.

• Avoid the temptation to dip into your savings: Perhaps you’re happy to lock your money away so there’s no temptation to touch it. This is where a term deposit or notice saver may be beneficial, as you usually cannot access your deposited savings until the end of the term or else face fees or interest rate penalties.

It’s important to note that if you’re keeping a large amount in your account, only $250,000 will be covered per Authorised Deposit-taking Institution (ADI) by the Financial Claims Scheme (FCS). In simple terms, this means that if the bank holding your savings goes bankrupt, the government will only reimburse you up to $250,000. Beware that some banks have multiple brands under the same licence (e.g., Westpac also owns Bank of Melbourne, BankSA and St.George Bank).

2. Be flexible with your choice of account

If you keep the majority of your savings in your everyday transaction account, you’re unlikely to earn a decent amount of interest, if any at all. If your bank offers a savings account you may be able to easily open one with them, otherwise comparing a variety of different savings accounts can help you find a competitive rate.

If you decide to open a savings account with a different bank, you may have to open a linked transaction account. Check if this new account charges any account-keeping fees and remember that you don’t necessarily need to use it if you wish to keep your current transaction account.

It can also be a good idea to look beyond your current bank, as loyalty rarely pays when it comes to interest rates. I did this when I started my own savings journey and was fortunate to find a different bank which had a strong ongoing savings rate and a linked transaction account that came with great features. I now use it as my travel debit card.

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3. Check account conditions

There’s more to a savings account than a high interest rate, so it’s important to check the fine print to make sure you don’t get stung by the details. Some banks, for instance, may reserve their best rates for those under 30. Your account might offer a great interest rate, but you may find you only qualify for that rate if you deposit a certain amount each month, or use your debit card a certain number of times. If you’re not careful, that great rate you signed up for could prove to be a mirage.

To set yourself up to earn the top rate from your bonus savings account, be sure to understand the conditions, and know whether you can realistically meet them. For example, if you need to deposit a certain amount each month, set an automatic transfer on payday. If you have to use your debit card to make five purchases, tick these off at the beginning of the month.

4. Switch when promo rates expire

It’s quite common for banks to offer a great introductory savings rate to get new customers in the door. These promo rates tend to only run for a few months, however, and when the honeymoon period’s over, you’ll be bumped back down to a lower base rate. Banks count on you sticking around after your promo period’s up, but there’s nothing stopping you from withdrawing your money and moving it to a different institution to take advantage of another promo rate. If you want to keep getting the best rates, keep track of when the promo period ends and be ready to switch.

If you’re willing to pick up the phone and talk to your bank, you may not even need to make the switch. Arm yourself with information on the best rates in the market and see if your existing provider is willing to match them, to encourage you to stick around. It may only take an hour or two of your time to make sure you keep getting the best rate possible.

5. Lock into ‘shorter’ term deposits

Term deposits can stop you from dipping into your savings before you reach your goal. If you’re happy to lock your money away, you might think that ‘longer’ term deposit rates (i.e., 6-month, 1-year, 2-year etc.) look particularly attractive. But remember economists are forecasting that the cash rate is likely to continue rising this year so locking in for a long period at a fixed rate could see you miss out on increasing rates.

When interest rates are likely to increase, it may be better to hold off on longer terms and spread your money across a range of shorter term deposits, such as three and four months. This way you can withdraw your money and access better rates if they’ve increased while your savings were locked away.

Tips for choosing a savings account or term deposit

• Check how and when interest is paid. This is especially important when it comes to term deposits as typically rates will differ depending on whether interest is paid monthly or at maturity (the end of the term).

• Check whether the account offers compound interest or simple interest. Most savings accounts will pay compound interest, which means you can earn interest on the previous interest payments you’ve already received. Term deposits, on the other hand, usually pay simple interest, which means you’ll only earn interest on your initial deposit.

• Consider the fees you could be charged. If you have to open a linked transaction account are there any ongoing account-keeping fees? What about if you need to withdraw from a term deposit before it reaches maturity?

• Find out whether you need to maintain a minimum balance or if there’s a maximum balance. For example, some providers lower savings rates depending on the amount of money in your account (e.g., 4.75% for balances up to $2 million and 2.50% for balances over $2 million).

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