How to grow your savings in the time of low interest rates

While COVID-19 hit many people hard, it has also helped so many households get ahead by boosting their rainy-day fund. But many Australians may be wondering how they can be expected to actually grow their new-found savings in the current low-rate environment.

The latest Australian Prudential Regulation Authority (APRA) figures show that for the month of November 2020, Aussies were able to squirrel away $1.099 trillion dollars into bank accounts, including offset accounts.

Compared to the same time last year, this is an extra $120 billion dollars - an increase of 12 per cent.

APRA statistics: deposits by households

Source: APRA.gov.au

The explanation for this growth can be attributed to the COVID-19 shutdowns and restrictions across most capital cities. Australians were not able to go out and make their regular purchases, such as food, drink, public transport, gym memberships and much more. For families, day care fees were also scrapped for a few months, and after school activities, such as swimming and sport, were put on pause.

Many Australians found themselves either unemployed or with more unstable working hours. However, for some casual workers, the $1,500-a-fortnight JobKeeper payments were significantly more than they were earning before. This meant that COVID-19 potentially helped them get ahead in terms of savings.

And, most importantly, COVID-19 has reiterated the importance of having a rainy-day fund. Saving money is something many Australians – especially young Australians - will now be thinking about seriously for the first time.

For all of these reasons and more, the impacts of COVID-19 have resulted in many people squirreling away hundreds of extra dollars each week.

Where can savers find a decent interest rate?

So, if you’ve got the extra cash, you may be wondering where you can still earn a decent return with Australian savers facing such record-low rates?

The truth is that savings rates really have tumbled. RateCity research shows the big four banks ongoing savings rates have dropped 0.90 per cent on average in the last year. Meanwhile, the Reserve Bank of Australia’s cash rate has gone down 0.65 per cent in this time.

Savings rates changes

Source: RateCity.com.au. Data accurate as of 19.01.2021.

If you want to keep your money in the bank, there are currently 3 main savings options you may want to consider choosing from:

• 1. Term deposits

A popular option with retirees, you lock your money away for a set term with the provider and you don’t need to add to it. At the end of the term, you get a guaranteed interest rate and return.

Right now, the highest rate you can get is 1.30 per cent for two, three and five years from Judo bank, but just 0.85 per cent for a 6-month term.

Highest term deposit rates on RateCity

Source: RateCity.com.au. Data accurate as of 19.01.2021.

• 2. Introductory term savings accounts

A type of savings account that typically offers you a high interest rate for around three to five months, and then drops down significantly. This option may suit someone who isn’t planning to add to their savings and may need that cash in a few months to buy something like a car or to put towards renovations.

The highest rate right now is 1.75 per cent from RaboBank – but after four months that rate drops to just 0.30 per cent. So, it may not be an ideal long-term option if you’re looking for rates above 1 per cent.

Highest intro-term savings accounts on RateCity

Source: RateCity.com.au. Data accurate as of 19.01.2021.

• 3. Ongoing savings accounts

Generally speaking, the savings accounts offering the most competitive rates tend to be ongoing savings accounts. These are where you put money into the account each month to earn the highest interest rates. This may suit someone who’s adding to their savings each month, even someone saving for a house, a new car or university costs.

Currently, ING offers the highest rates of 1.35 per cent. However, for young Aussies, Westpac (age 18-29) and Bank of Queensland (age 18-24) are offering a whopping 3 per cent interest on their savings accounts.

Highest conditional savings accounts on RateCity

Source: RateCity.com.au. Data accurate as of 19.01.2021.

Are there any alternative options outside of savings and deposit rates?

Some Australians may want to invest their money in more traditional options, such as shares, bonds and even peer-to-peer lending. Those returns are not guaranteed but they have potential to earn you a higher return.

However, another option for people who have home loans, and who are looking to keep risk low, is to use their savings to make extra repayments, or put it into their offset account.

If you have money sitting in your bank account (not your offset) the interest rates on home loans are generally significantly higher than the interest rates on savings accounts. According to the RBA, the average owner-occupier home loan rate is 3.17 per cent while the average savings rate is 0.39 per cent.

So, you may potentially be saving a lot more interest than you’re earning by moving it from your savings account to your offset account. Plus, if it’s your own home, you won’t be paying tax on your savings. Making extra repayments on your home loan will also help you shave months if not years off your home loan and also pay significantly less interest in the long run.

Compare savings accounts