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As interest rates climb and homeowners squeal for mercy, there are two groups often forgotten who can now enjoy the fruits of rising rates: the wealth builders and the retirees.
For eight long years, these people have felt sick every time interest rates dropped, wondering how to generate any income at all from their hard-earned savings without taking too much risk.
Now, rates are rising, but you will probably need to switch banks if you want to earn decent interest on your cash. The world of banking has fundamentally changed, and it’s important to understand why your money isn’t their priority anymore.
The big banks will be happy to hold your funds at mediocre rates, but they won’t chase you with good returns on cash.Credit: Paul Rovere
In the past, banks made money in many ways. They charged fees for holding funds in transaction accounts and paid you almost no interest. They loaned this money at much higher rates to people buying houses and made a killing.
In addition, they made money through fees charged by their investment arms. And finally, they offered term deposits, again lending these funds to those taking home loans, albeit at lower margins. But those days are long gone.
In 2023, a bank’s only objective is to seek out deposits at the lowest cost and make a margin by lending money to homebuyers and investors at higher interest rates. That’s it. Banks have large swaths of shareholders that judge critically, so they only chase the types of customers that can deliver profit.
Find a bank that wants your money and get switching.
For most people who have paid down their primary mortgage and are now in the wealth-building phase of their lives, I am speaking directly to you when I say that the big banks will be happy to hold your funds at mediocre rates, but they won’t chase you with good returns on cash.
So if you want great interest rates on your savings in this market, it is time to switch banks.
Bankers are smart. They don’t think middle and older generations can be bothered switching banks and their internal data models label you as passive income. I’m here to make sure you know that you are the only person looking after your hip pocket.
Let’s talk about what kind of banking structure you should consider if you have paid off your home loan and have idle cash.
Your transaction account, the account through which you pay your bills, is something the banks value. They want to boast to shareholders about “growing their customer base.” So take advantage of your ability to switch banks as a powerful tool.
If you contemplate switching, banks will entice you with bonuses and better rates. If you make just three transactions a month with a particular bank instead of ten, you are indicating that they are not your primary bank, and they will strive to win you over for bragging rights.
If you’re a wealth builder or retiree, what you need isn’t just a transaction account but also a high-interest rate on your savings. Banks offer three types of high-interest accounts in various forms. Some of these accounts aren’t designed for wealth builders and retirees.
The primary of these are online savings accounts. They offer the highest interest rates, low or no fees. To use them, you need to link them to a transaction account. Tier two banks, without branches usually provide more exciting interest rates although some charge fees for ATM withdrawals. If you don’t need a branch, don’t feel the need to pay for a bank that offers one.
Some banks, like Macquarie and ING who seem to really want deposit customers, offer you even better rates if you have your transaction account with them too.
Next, there are behavioural savings accounts. They pay a base interest rate and a significant bonus for meeting specific savings goals, designed to encourage savings behaviours such as saving for a home loan. Banks position them precisely for that purpose so they can lure loyalty in early and offer great home loan deals. Some banks even offer bonus interest rates for the cool cats aged 18-35. Ignore them. They aren’t for you.
Lastly, there’s the all-familiar term deposit. It offers a guaranteed high-interest rate if you lock your savings in for an agreed period. Nowadays, term deposits have become more of a tool to set aside cash out of sight and out of mind, rather than serving the bank’s interests.
Interest rates on 12-month term deposits are often marginally lower than the rates available on the most appealing online savings accounts. The benefit of a term deposit is that once locked in, the rate won’t slip away if the bank decides to play with its variable rates.
So, what can you do? Look after yourself, of course! Find a bank that wants your money and get switching. There are better interest rates outside the big four for wealth builders and retirees.
Bec Wilson is the author of How To Have An Epic Retirement now available for preorder and writes a weekly newsletter for pre- and post-retirees at epicretirement.net.
- Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.
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