Comparison site Mozo.com.au says there are no savings accounts in its database with an interest rate high enough to keep savers ahead of tax and inflation. In other words, the real value of money in savings accounts is falling.
Mozo director Kirsty Lamont says deposit-taking institutions have cut rates on 35 accounts since the start of the year, despite the fact that the Reserve Bank has not changed the cash rate since August last year.
And the inflation rate has climbed from 1.5 per cent to 2.1 per cent since the start of the year.
Lamont says Mozo has calculated that savers would need to be earning an interest rate of 3.1 per cent to earn a real return – ahead of inflation and tax.
The average ongoing savings account rate has fallen from 2.04 per cent to 1.83 per cent over the past 12 months.
“The highest savings account rate on the market now is just 3.05 per cent,” Lamont says.
That rate is the ongoing bonus rate on ME Bank’s Online Savings Account. Savings accounts with ongoing bonus rates of three per cent include AMP Bett3r Save, Australian Unity Active Saver, ING Direct Savings Maximiser and Newcastle Permanent Smart Saver.
“For those who can afford to stash their cash away for two or more years, there’s a handful of term deposit accounts with inflation-beating rates,” Lamont says.
Maitland Mutual Building Society is offering 3.4 percent for a three-year term – currently the best TD rate in the market.
Other providers offering rates above 3.1 per cent include: Greater Bank, offering 3.3 per cent for five years; RaboDirect, offering 3.3 per cent for five years; Greater Bank, offering 3.2 per cent for four years; Maitland Mutual, offering 3.2 per cent for two years; QT Mutual Bank, offering 3.2 per cent for three years; and Qudos Bank, offering 3.2 per cent for three years.
Investors should look at some of the alternative for parking their cash. In some cases they may have to trade off easy access to their funds and in other cases they have to take more risk.
Pay off debt. For investors who don’t need the cash and who have debt, the best alternative to putting their funds on low-rate deposit accounts is to pay off debt. High-interest credit card debt should be the first priority but a mortgage offset account is also a good option. Offset accounts are a form of tax-free savings, reducing the loan balance on which the monthly interest is calculated. That saving on interest is, in effect, a rate of return set at the mortgage rate and is tax-free because there is no capital gains tax on the sale of the principal residence.
Mortgage trusts. Before the financial crisis mortgage trusts were a popular alternative to savings accounts. Fund managers invested in a portfolio of mortgages and paid distributions out of the interest payments. The sector ran into a liquidity crisis during the financial crisis and a number of trusts were closed down.
There are still mortgage trusts in the market, although there have been some structural changes. Most of them require funds to be invested for a minimum of 12 months. And their rates are pretty low; Equity Trustees’ EQT Mortgage Income Fund paid a net return of 2.8 per cent over the 12 months to the end of March – about the same as a 12-month term deposit.
Hybrids. In recent years a lot of retail investment money has poured into hybrid securities issued by banks and other financial institutions. These investments have been paying income returns of four per cent plus, which explains their appeal. However, last month Standard & Poor’s downgraded bank hybrids, which are no longer investment grade securities. This poses additional risks for investors, who want security as well as high returns.
Peer-to-peer lending. Funding for peer-to-peer (or marketplace) loans is sourced from wholesale and retail investors. Most loans are unsecured personal loans. Most P2P platforms are structured so that investors invest on a “fractionalised” basis, with multiple exposures to parts of a number of loans. Some platforms allow investors to fund a whole loan. Others offer a pooled approach through a managed fund, giving investors exposure to all loans in the portfolio.
Lenders report that investors can earn around six or seven per cent on their money. In a recent survey of nine lenders, the Australian Securities and Investments Commission found that defaults ranged from 0.1 per cent to 3.4 per cent (at June 30 last year) and historical defaults ranged from 0.25 per cent to 12.2 per cent. Loans in arrears represent 3.1 per cent of total loans outstanding.