Reserve Bank interest rate cut could see you get less money back on your savings

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It might not be the worst problem to have during a recession, but for Australians with decent savings in the bank, record low interest rates are posing a dilemma.

The Reserve Bank is expected to lower the country’s official cash rate to a historic low on Tuesday. It already bottomed out in March at 0.25 per cent.

While the cash rate is just a benchmark, it sets the precedent for the interest rates that the banks go on to offer everyday Australian consumers.

A lot of the focus often ends up on how this impacts people’s home loan repayments.

And right now, if you are lucky enough to have a stable salary, the interest repayments on your home loan have probably never been more manageable.

But every action has a reaction.

One way for the banks to balance out the books is to lower the deposit rate.

And in the past six months, the big four and independent banks have been slashing their deposit rates.

In October alone, price comparison website RatesCity found 50 banks cut deposit rates.

When it came to the majors, RatesCity found NAB was offering a slightly better rate than the others until last week, when it lowered its rate for the fourth time since March.

Independent small banks have generally been more competitive in this space.

On Sunday, the institution that was offering the highest rate to Australian customers, Up Bank, also decreased what it’ll pay its customers for banking with them.

Even children are being impacted. Commonwealth Bank has slashed the rate on its famous Dollarmites account for youth four times since March.

“This unprecedentedly low interest rate environment does mean we regularly review our products and make changes to some of our deposit and savings interest rates,” a spokesperson said in a statement.

So what does this mean for my savings?
For those with a standard bank account, the base rate on a savings account is important.

Sometimes customers get a “bonus rate” for not taking too much out.

“We’ve seen bonus rates take a battering from banks big and small,” RatesCity analyst Sally Tindall said.

“The base rates are now so low there isn’t anywhere to cut.”

The average Australian has $26,854 in savings.

On that amount, they would be making roughly $10 a month in interest, compared to around $30 in June 2019 when deposit rates were higher.

Deposit rates are also dropping on longer-term conditional savings accounts, which people sometimes put cash in when they’re saving for a bigger investment, such as a car or home deposit.

Right now, customers who deposit savings in a fixed-term account and do not touch the money for six months do not get as big a reward as previously.

Sydney university student Will Grant is one young saver who has noticed a reduction in his deposit rate.

He has been saving for his first car for the last 12 months.

In recent months, the commerce student noticed that his bank had dropped his deposit rate down to 0.75 per cent.

“That was pretty low,” he said.

“So I thought I should put my money into something else where I could make more money.”

He has now put 15 per cent of his savings into the stock market to try and make better gains.

“Dad has been guiding me through it and telling me what to do or what not to do,” the 20-year-old said.

a young man smiling

Sydney university student Will Grant is putting some of his savings into stocks because deposit rates are so low.(Supplied: Will Grant)

A club that Will Grant is affiliated with, the Youth Investment Group, said it had noticed a trend of more younger Australians putting money into stocks during COVID-19.

Mr Grant said he might put more money into stocks if deposit rates do not improve, but that he would always be keeping a large amount in savings due to their much lower risk.

Bank deposits of up to $250,000 are guaranteed by the Federal Government.

Whereas, if you invest in stocks that fail, there is nothing protecting your losses.

RatesCity’s Sally Tindall cautioned savers to remember this before pulling money out of the bank.

“There is a concern that young people will go out and seek riskier alternatives,” she said.

But with the vast majority of Australians having a savings account, it was worth people at least checking out what deal they are currently on.

“It’s always worth shopping around as there are some banks who want your business more,” she said.

What if I have heaps wrapped up in savings?
For most Australians, a decrease in deposit rates will be at worst annoying, but the change is noticeably affecting a certain portion of wealthier Australians.

Recession v depression

Sarah Gonzales is a financial planner who advises retirees on what to do with their superannuation funds.

The majority of her clients have between $1 million to $5 million portfolios, and many of them have some of that money in conditional savings accounts that previously would have been giving them a tidy amount of interest.

“For a client with significant cash in their portfolio, they would rely on (the interest) to pay for their living expenses,” Ms Gonzales said.

While deposit rates have been especially low during COVID-19, Ms Gonzales said her clients had been noticeably impacted by lowering rates from mid-2019, when the Reserve Bank cut the Cash Rate to a then-low of 1.25 per cent.

She said some of her retired clients were currently mulling taking some money out of bank deposits and putting it into property instead, to see if that could get them better returns.

“They are obviously seeing over the years what property values have done. But they’re cautious,” Ms Gonzales said.

“For most of the clients, obviously the cash flow has declined, but since we’re in a situation where not many people are travelling or moving around, they’re adjusting their expenses and reducing how much they spend, to compensate for the reduced cash flow.”

Perth woman Jan Hollingsworth is a self-funded retiree who lives off her superannuation and does not take a Federal Government pension.

One year ago, she got so fed up with deposit rates on fixed-term accounts being so low, that she “threw the towel in” and brought all of her money into a standard savings account.

That has now put her in a tricky situation. Ms Hollingworth is not getting noticeable interest back to live off, so she is eating into her savings as time goes on.

“I just have to do something as I can’t keep living like this,” she said.

an older woman looking at a camera

Jan Hollingsworth is a self-funded retiree who is in a tough situation due to record-low deposit rates.

Ms Hollingsworth is worried that if the Reserve Bank cuts the cash rate again, her bank’s deposit rate will drop even further.

RatesCity analyst Sally Tindall said it is difficult to predict what the banks would do with another rate cut.

While anything might be possible in a pandemic, Ms Tindall does not think Australia will see a scenario where banks will bring in negative interest rates.

“I don’t think we will get there. I don’t think banks will charge us to deposit with them. I don’t see that happening,” she said.

“But I don’t rule out the banks going to a flat zero per cent.” 

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30 Comments

Total Comments: 30
  1. 0
    0

    Another case of aged pensioners losing out. With no superannuation
    I rely on my term deposits for my money to grow. Centrelink wins again. Deeming rates need to be addressed urgently.

    • 0
      0

      Nanna75, you make it sound like there is a deliberate policy of manipulating interest rates to disadvantage retirees who are dependant on their savings. It is a case of being in the right place but at the wrong time. When interest rates were high savers would be smiling and borrowers frowning, currently it is the borrowers who are smiling and the savers who are frowning. I suspect we both lived through interest rates in the teens and struggled with our mortgages etc and, while it seems unfair, now the shoe is on the other foot we lose out again. As many notably famous, and possibly infamous, people have observed, Life is not fair.
      But then again neither are the deeming rates.

    • 0
      0

      I am not overly upset for you, a single pensioner can have up to $252800 before deeming impacts and couples it’s $443378.

    • 0
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      Nanna75 then it behoves you to do the homework and move your money to a better account once the term is up.

    • 0
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      bank interest rates are not increasing before inflation kicks back in and that aint happening any time soon. Japan has been trying to get out of a low inflation, low growth environment for 20 years. You might want to rethink your investment strategy Nanna.

  2. 0
    0

    Spare a thought for those people in countries with minus interest rates. People in Switzerland have taken money out of the banks and keeping it now at home as it costs them money to leave it in the bank. Where is this all going to lead us? I’m maybe of the old school, thinking that we should be rewarded for saving before spending. This has now been turned on its head. We’ll soon find out the consequences.

    • 0
      0

      Franky – you are right. My family lives there, but you have to have more than 100’000 in the bank to be charged -.75% interest. Accounts under you get nothing but are not punished either. I can see it happening here, once it is 0.10% the slip is in. Renting a bank box is probably cheaper if you have enough, at least they have large notes not like us at $100 max.

  3. 0
    0

    We’re so lucky Labor is not in government.

    • 0
      0

      Why? They might address our manufacturing base, or lack thereof, and move us in a better direction. Can’t wait for the next election, when the LNP will have amassed a debt in excess of a Trillion dollars and we will still have a weak economy based on selling our resources as fast as we can.

    • 0
      0

      Have you been buying Aussie manufactured goods in the last 20 years, Buggsie? Or were you even able to do so? We can not compete with wages and our consumers will mostly go for the cheaper stuff.

  4. 0
    0

    Einstein’s definition of in sanity – “endlessly repeating the same process, expecting a different outcome”. Sounds familiar? Have any previous rate cuts improved the economy? No? Then the current one is just as insane, benefiting big business at the expense of young savers, pensioners and self funded retirees. The economy was weak before Covid struck, is a disaster now and nobody is really addressing how to fix it. At the same time Scotty our marketing PM has managed to royally piss off our major trading partner – China – and our desperate financial situation is only getting worse. Counting on America to help solve our woes? Forget that, it is rayally Trumped and will only get worse no matter who wins – being best buddies with a waning superpower is not sensible and should be addressed.

    • 0
      0

      So you feel the interest rates should be much higher? 5, 6, 7 %, or more?

      Do you think that would encourage investment in industry, in housing?

    • 0
      0

      Agreed Buggsie.

      Greg, being a self funded returee doesn’t make everyone rich and for a single person on a limited income I am not eligible for a part pension.
      I am currently spending capital to pay council rates and at times to buy food. That capital was supposed to be used for major house repairs or to replace a 24 year old motor car when needed.

      Higher interest rates would certainly help me, and others like me, to stop spending their capital.

    • 0
      0

      On a limited income you should be able to get a part pension, have a look at the situation again, AutumnOz. Unless your limited income is higher than I understand the term to be.

    • 0
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      be careful what you wish for Autumnoz. A world in which Australian interest rates are 5% while other countries around 0% might avoid drawing down your capital and make replacing your car cheaper however it would also push up the A$ and have devastating consequences to jobs and government income in the process.

    • 0
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      Wrong Mariner. Sorry. Doesn’t matter how low your income is, if Centrelink says you have oo many assets or have gifted too much, you get NOTHING.

    • 0
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      To be self funded as a single person, and assume a homeowner, assets would need to be above $583,000 and/or assessable income above $53,731pa. That’s a lot of house repairs or replacement of a motor vehicle.
      If pension is precluded because of assets and you’re drawing down then you may be eligible in the future. If your assessable income is above almost $54k, well……

    • 0
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      Right, Youngagain – had to get rid of some assets up north and buy my own place and then I was OK. Sorry for the oversight, was 10 years ago.

    • 0
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      Skiing, assets above $583,000 might well generate less than $12,000 a year income – or NOTHING in some cases, where assets can’t be liquidated. I agree the income test is quite generous. The assets test is cruel and unfair.

  5. 0
    0

    The Governor of the Reserve bank should resign for pushing interest rates to this level. His actions to force the dollar down may make our foreign debt look lower, at the expense of the rest of the community

    • 0
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      A lower dollar means a higher foreign debt, foreigners lend money mostly in their own currency which has to be paid back. I took out a foreign sourced loan once and I really took a bath.

  6. 0
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    Lower interest rates only push asset prices higher. Stocks, bonds and houses are now extremely over-valued. Lower interest rates forces self funded retirees into riskier investment like shares. This is only going to end badly but probably not for a few more years. The politicians have lowered the interest rates to buy votes. Now interest rates are zero there is no place to move lower if there is another crisis which is guaranteed. We need a new political party of smart people who aren’t there just for their own gain. A tall order.

  7. 0
    0

    As I understand it, if your income from reduced interest rates of investments (or if income from any other source) falls below a certain limit, you can seek a top-up pension. Under such circumstances you are still considerably better than a person whose sole income is the age pension. In fact I understand that a person can have income of around $2,000/fortnight (ie more than twice the age pension) and still receive a top-up pension… so I suggest all self-funded retirees stop complaining and be thankful!

    • 0
      0

      Wrong Dancer. You cannot get a pension if Centrelink decides your assets (which are effectively deemed at a whopping 7.5%+++ when assets exceed a certain low limit) are too high or you have gifted too much. Lots of people have very low incomes and are forced to live off their savings – IF they are able to convert their assets to cash. I’ve been in a situation where Centrelink assessed assets that were useless and unsalable at very high values. Despite having nothing to live on, I could not get anything from Centrelink.

      You are right about generous income limits. It’s those with modest assets but limited ability to understand how to invest profitably who are being totally screwed, and I think you’ll find that’s who is doing the complaining – not folk with income above the pension level.

    • 0
      0

      So a single homeowner with other assets in excess of $583,000 has modest assets? Interesting. As for gifting, why should the taxpayers support you when you could have contributed to your own support? And the gifting rules only apply to excess amounts for 5 years. If you give away enough to be not getting a pension maybe the person/s who benefited from your generosity can help you out.

    • 0
      0

      Depends on a lot of factors, Skiing. It’s so easy to make invalid assumptions and be nasty and judgmental when you have no idea of the situations others might find themselves in. Age, health, future needs, the nature of assets, family circumstances… all of these factors influence how much money someone needs. A person’s ability to invest safely and profitably is significant. And the source of the funds is relevant too. If someone went without a great deal to accumulate personal savings, knowing they would have future needs, it is disgusting to imply that they should have to simply spend those savings to benefit taxpayers.

      The circumstances under which gifts were made are relevant. Maybe the beneficiary CAN’T help out? Maybe the gift was given in a situation where a loved one was in dire straits and desperately needed assistance?

      Maybe if people stopped the nasty assumptions and cruel judgments and started considering the possibility that everything isn’t quite as simple as you would like to pretend, we could drive some fair social reform and make life more tolerable for everyone?

  8. 0
    0

    As I understand it, if your income from reduced interest rates of investments (or if income from any other source) falls below a certain limit, you can seek a top-up pension. Under such circumstances you are still considerably better than a person whose sole income is the age pension. In fact I understand that a person can have income of around $2,000/fortnight (ie more than twice the age pension) and still receive a top-up pension… so I suggest all self-funded retirees stop complaining and be thankful!


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