With interest rates falling for savers, are you better off just using a Bonus Saver account?
When we last looked at this in January, they paid an average of 4.12% (4.01% by the main banks). Today they pay just 3.59%, 3.48% on average by the main banks.
The -53 basis points (bps) drop basically reflects the fall in the Official Cash Rate (OCR) over the period.
Over the same period the average one year term deposit interest rate has fallen -61 bps to 3.84%.
Lower rates are likely. When the Reserve Bank does its next Monetary Policy Statement review on September 10 another -25 bps OCR cut is expected taking it to 2.75%. Bonus saver interest rate offers will probably fall in unison. Recent history shows that term deposit offers reduce more gradually and relentlessly and the reductions end up more than for Bonus Savers over similar periods.
Bonus saver accounts pay a premium interest rate if you add to them each month and forsake withdrawals.
They are ideal for building savings for a specific goal such as a house or car deposit because you can withdraw them at call or a minimal notice period.
The are also effective because they still pay more than CPI inflation which means your savings grow in real terms. But the advantage is getting narrower.
And there are catches.
First up, the IRD takes tax from your interest monthly. Even though interest is credited monthly, it turns out to be much less that you might otherwise assume because of the withholding tax deductions. Use our handy deposit calculator to see this effect.
And secondly, the penalty for not meeting the ‘bonus terms’ is usually loss of almost all your interest. The Kiwibank product is not as fierce in this regard, but neither does it reward you as well for meeting the terms.
There are also surprising benefits. The interest rate paid is often better than for longer fixed term deposits.
And if you are starting out you can get a much better rate with a low balance saved.
But there is also risk.
Banks want you to choose the ‘bonus saver’ option because when they reduce interest rates they can reduce what they pay you immediately. This is not so with a term deposit where they are committed to the original interest rate until the end of the term. These days, interest rate offers only seem to go down, so it is an important consideration. If you are needing to save to about a year or longer you will want to think about this aspect.
And if you choose choose to go the term deposit way you should also think about a term PIE deposit as you can then get an embellishment to the after tax return – that is, many people will get a lower tax rate than for a standard term deposit.
We recommend you ‘do the numbers’ on an after-tax basis and the best way to do that is to use our deposit calculator.
Here are the current bonus saver rates on offer by banks today:
(These rates are taken from our comparison page here.)
* Kiwibank also offers a Notice Saver account where you can earn 3.30% if you give them at least 32 days notice to withdraw and 3.75% if you give them 90 days notice to withdraw. Kiwibank Notice Saver accounts require a minimum balance of $2,000 for these rates to become effective.
TSB Bank deals with bonus interest differently to other banks. It’s core everyday offer is its Premier account. This has a tiered interest rate offer that pays 2.50% for balances of less than $20,000, 2.75% of the portion of the balance from $20,000 to $35,000, 3.00% on the balance from $35,000 to $50,000, 3.50% on the balance from $50,000 to $100,000 and 3.90% on the portion over $100,000.
Even if you had $100,000 in the account all year you would not earn 3.90% gross from TSB Bank. You would earn $3,112.50 or 3.11% pa before tax. And they only pay this interest once a year at March 31.