How to Make Higher Interest Rates Work for You

In the realm of personal finance, finding ways to maximise returns on cash is a common objective for many individuals. In Australia, understanding the interest rate environment and making informed choices about bank accounts can play a vital role in achieving this goal. This article aims to provide a basic overview of the Australian interest rate environment and highlight strategies to maximise returns on cash through various bank account options. 

Current Interest Rate Environment 

The interest rate environment refers to the prevailing rates set by the Reserve Bank of Australia (RBA), which impact the borrowing and lending rates across the country. These rates have a direct influence on the interest rates offered by banks on deposits and loans. When the RBA raises interest rates, banks tend to pass on the increase to savers by offering higher interest rates on savings accounts. Conversely, when the RBA lowers rates, banks generally decrease the interest rates they pay on deposits 

Over the past 12 months, the Reserve Bank of Australia (RBA) has made several increases to interest rates, reflecting its response to changing economic conditions and inflationary pressures. The RBA’s primary objective is to maintain price stability and promote sustainable economic growth. In its efforts to achieve this, the RBA has raised interest rates to counter inflationary pressures and manage the overall health of the economy. These rate hikes have had a direct impact on borrowing and lending rates across the country, affecting various sectors such as housing, consumer loans, and business investments. The RBA’s decisions to increase interest rates are based on careful analysis of economic indicators, including inflation, employment, and GDP growth, among others. As the RBA aims to strike a balance between controlling inflation and supporting economic growth, these interest rate increases have been implemented to ensure the stability and resilience of the Australian economy. 

How to Maximise Return on Cash 

Traditional Online Savings Accounts  

One of the most common ways to keep cash and earn interest in Australia is through traditional online savings accounts due to their competitive interest rates and convenient access through online banking platforms. These accounts provide a secure and accessible option for storing cash while earning interest.  Many banks offer introductory rates, which can be higher for a limited period before reverting to a lower ongoing rate. It is essential to consider the ongoing rate when comparing options. 

High-Interest Savings Accounts 

In recent years, high-interest savings accounts have become increasingly popular in Australia. These accounts typically offer higher interest rates than traditional savings accounts, helping savers maximize their returns. However, higher interest rates often come with certain conditions, such as minimum deposit requirements or limited access to funds. It is crucial to assess these conditions and ensure they align with your financial goals and liquidity needs. For example, ING Bank are currently offering new customers 5.50% on balances under $100,000. 

Term Deposits 

Term deposits are fixed-term investments where you deposit a sum of money with a bank for a predetermined period at a fixed interest rate. These accounts offer a higher interest rate than regular savings accounts but require a commitment to keeping the funds locked away for the agreed term, which can range from a few months to several years. Term deposits are a suitable option for those who do not require immediate access to their funds and are seeking a predictable return on their cash. As an example, Macquarie Bank are currently offering 5.00% for a 12-term deposit. 

Cash Management Accounts 

Cash management accounts are designed to offer both the flexibility of a transaction account and the higher interest rates associated with savings accounts. These accounts often combine transactional features like debit cards and unlimited electronic transactions with competitive interest rates. Cash management accounts can be an ideal choice for individuals seeking both accessibility and higher returns on their cash. 

Understanding the Impact of Higher Interest Rates on Households and Businesses 

High interest rates can have significant implications for both businesses and consumers. For businesses, high interest rates increase the cost of borrowing, making it more expensive to finance investments, expansion, and day-to-day operations. This can limit their ability to access credit, resulting in reduced capital expenditure, slower growth, and potential job cuts. Moreover, high interest rates can dampen consumer spending as borrowing becomes more expensive, leading to decreased demand for goods and services. Businesses reliant on discretionary consumer spending, such as retail and hospitality, may experience a decline in sales and profitability. Additionally, high interest rates can discourage entrepreneurs and new business ventures, as the cost of capital becomes prohibitive. Overall, high interest rates create a challenging environment for businesses, impacting their ability to thrive and potentially stifling economic growth. 

On the consumer front, high interest rates affect various aspects of personal finance. Mortgage repayments become more expensive, increasing the financial burden on homeowners. This can result in reduced disposable income, limiting consumers’ ability to spend on non-essential items and negatively impacting retail sectors. Higher borrowing costs can also make it more challenging for consumers to access credit for large purchases such as cars or home improvements, potentially delaying or preventing these transactions altogether. Additionally, credit card debt and personal loan repayments become costlier, which can lead to financial stress for individuals and families. Overall, high interest rates can squeeze household budgets, curbing spending and potentially dampening economic activity at the consumer level.  

Benefits of Reviewing Current Loans/Mortgages 

Reviewing your mortgage periodically is a wise financial move that can potentially help you secure a better interest rate and save money in the long run. Interest rates fluctuate over time, and as a homeowner, it’s essential to stay aware of these changes to ensure you’re getting the best deal possible. Start by examining your current mortgage terms, including the interest rate, repayment period, and any associated fees. Then, compare these terms to the prevailing market rates and offerings from other lenders. If you find that the current rates are significantly lower than what you’re currently paying, it might be an opportune time to consider refinancing your mortgage. 

When reviewing your mortgage, it’s crucial to consider factors beyond the interest rate alone. Take into account any fees associated with refinancing, such as application fees or exit fees from your current lender. Calculate the potential savings you would achieve by refinancing and determine how long it would take to recoup the costs associated with the process. Additionally, evaluate your long-term financial goals and how refinancing fits into your overall strategy. A lower interest rate can lead to reduced monthly repayments or the possibility of paying off your mortgage faster. However, it’s important to assess your financial stability and the impact that refinancing may have on your budget. Consulting with a mortgage broker or financial advisor can provide valuable insights and help you make an informed decision regarding your mortgage review. 

Maximising returns on cash in the Australian interest rate environment requires careful consideration of the available bank account options. Traditional online savings accounts, high-interest savings accounts, term deposits, and cash management accounts are among the options to consider. Each option has its own set of features, interest rates, and conditions that must be evaluated based on personal financial goals and liquidity needs. By staying informed about the interest rate environment and making informed choices about bank accounts, individuals can effectively maximize returns on their cash and achieve their financial objectives. 

Accru can offer further support and advice, to help you understand your financial environment, and maximise potential interest opportunities.

About the Author
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Accru Melbourne
Accru Melbourne delivers positive financial solutions through exceptional client leadership. We’ve managed clients’ financial needs for more than 150 years and have a team of nearly 100 professionals delivering responsive, personalised and proactive financial solutions for both individuals and businesses across business advisory, audit and wealth management services.
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