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Australian Banks Continue To Battle For Deposits By Offering High Introductory Rates
Australia’s largest banks are using high introductory online savings rates to attract retail deposits and expand their deposit bases. Despite the high introductory rates, the lenders later aggressively cut back their deposit rates in order to preserve their profit margins.
The investment bank Macquarie conducted an analysis of the online savings market which found that the big four Australian lenders, as well as some international rivals were offering introductory rates that were as much as 200 basis points higher than the 4.5 per cent official cash rate.
The study found however that those rates were aggressively cut back within four to six months, bringing them in line or just higher than benchmark interest rates.
Virgin Money currently offers the highest savings rate in the market at 6.75 per cent, followed by UBank offering 6.51 per cent, Citbank at 6.45 per cent.
Three of the majors, the CBA, NAB and Westpac, offer 6 per cent, while ANZ lags the field at 5.25 per cent. The headline rates of the majors are 129 basis points above the 90-day bank bill.
The rates which seem quite attractive to begin with are rolled back within the first three months.
According to Craig Turton, an analyst with Macquarie, lenders began the trend of raising their online rates in tandem with official interest rate hikes at the end of 2009.
“In mid 2008, when the cash rate was 3 per cent, term deposits grew much more rapidly than savings account rates because of 200 basis points difference between headline rates. The increased competition in the online market coincided with six increases in the cash rate. The cash rate increases flattened the yield curve, narrowed the difference between online savings and term-deposit headline rates and stemmed the flow to term deposits.” Mr. Turton said.
Headline term deposit rates continue to remain high, with one and three-year deposit accounts still the most expensive source of retail funding for the major banks. The one and three-year term deposit rates are up to 250 basis points above the bank bill rate.
Gail Kelly, chief executive of Westpac last week said that the lender would not engage in an online savings war with her other Big four rivals. Westpac has one of the most aggressively priced term deposits in the market.
The research from Macquarie also suggests that that the margin pressure from higher retail deposit rates would not have as large an impact as expected for the banks with greater residential lending market shares.
Previously the assumption had been that lenders which were weighted more towards institutional lending would be able to offset the costs of higher deposit rates, by raising business lending rates.
“The banks with more term-deposit funding on the liability side and mortgages on the lending side should fare better than those banks with proportionately larger institutional lending books,” he said. “The spreads on new institutional loans are now falling due to two emerging sources of competition.”Mr. Turton said
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Three Ways To Save A Bit Of Cash In A Low Interest Rate Environment
With governments globally raising income tax rates in their response to fiscal deficits run up during their attempt to deal with the financial crisis, it is becoming increasingly difficult to save.
In Australia, fortunately the government so far has yet to raise tax rates, the top marginal tax rate is the same as it was last year however it is still at a hefty 45 per cent.
Australia is indeed one of the few countries that has not aggressively raised taxes, whilst at the same time has also begun tightening monetary policy, so interest rates are no longer at near half century lows.
If however you find yourself living in a place where like the UK for example, the top marginal tax rate has been raised to 50 per cent, whilst the bank rates are less than half a per cent, then clearly difficulties in obtaining returns on one’s savings does become a problem.
Those seeking returns are therefore being extremely inventive in sourcing methods to beat their savings problems, using offset mortgages, cash back credit cards, paying private school fee upfront.
Here is how it works
CASHBACK
Low bank interest rates are not the main problem in Australia, with the official cash rate at 4.25 per cent, and many lenders offering term deposit rates well in excess of that level. But for those who want easy access to their cash, and want to find a way of making some savings at the same time, then a cash back card is a good idea.
Many lenders seem to offer better rates for spending money using their credit cards, in some countries it is more profitable to spend on a credit card than using your savings.
The card issuer typically offers a cash back rate of something like 1 per cent, when you spend money using your credit cards with participating retailers.
The big advantage is cash back spending is tax free, so if you live in a place where the bank rates are puny, and a 1% cash back rate is competitive relative to the interest on your savings, then it makes sense to use the card to spend, not only do you earn cash back, but that is not taxable, unlike the cash sitting in your savings account.
OFFSET MORTGAGES
For those income earners who find themselves in the top tax bracket, holding a mortgage and a savings account, now would be a good time to enquire about the possibility of switching your mortgage over to an offset deal.
Offset mortgages work by simply offsetting the borrowers savings against their mortgage debt, with interest accruing on the remaining balance.
This means that the mortgage debt is paid off far earlier than otherwise would be, with the interest only accruing on the remaining balance, which is far less than the tax payable on the same amount.
The best thing about offset mortgages is the fact that cash balances can be accessed whenever you have the need to dip into them.
Ann offset mortgage allows the borrower to earn tax free interest on their savings at the same level as the mortgage, and is very useful for top rate taxpayers, who have a decent amount of savings.
PAY SCHOOL FEES UPFRONT
If you are sending your children to private school, then one way to save cash and reduce tax is pay the fees upfront. What the school will tend to do is place the money in a separate account, which is supposed to protect you from any closure or bankruptcy.
The school places the money in a deposit and returns the interest earned from the deposit in the form of discounts. Most schools have charitable status, so their interest income is tax free, which has the effect of the discounts often being far better than the interest received were the money held in a taxable savings account.
Bursars report increased interest in paying fees in advance, thereby netting a higher effective return than on cash deposits. Your money tends to be kept separate from a school’s financial affairs, so it should be protected if it closes or gets into difficulties.
When you pay upfront, the school puts the money on deposit and passes back the interest earned in the form of discounts. Schools earn interest tax-free thanks to their charitable status, which means the discount is often far better than the interest you would receive on a taxed savings account.
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At time of publishing the interest rate that SmartyPig accounts pay is an extremely competitive 4.5 per cent which is paid once a quarter with no fees. The idea behind the account is relatively simple. Individuals set savings goals with a specific purchase decision in mind, which can be as little as $500 for a Blue Ray DVD player, or $5000 for a holiday to Bali.
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