FRUSTRATED first home savers and retirees risk playing a dangerous financial game as savings account interest rates sink to new lows.
The latest Reserve Bank of Australia figures show that interest rates on term deposits, online savings accounts and cash management accounts have plunged 70-90 per cent in the past nine years.
Savers should not expect a rebound soon, and some are turning to riskier forms of income that may derail their home deposit or income plans.
This increases their chances of suffering short-term losses as global financial markets enter the historically volatile September-October period.
Investment groups and advisers have noticed rising numbers of people hunting higher incomes, and RateCity spokeswoman Sally Tindall said retirees had been worst affected.
“The problem is that right now savings accounts and term deposits don’t deliver much more than the current inflation rate,” she said.
“First home buyers are also sitting on the wrong end of the interest rate seesaw.”
Savings account interest is taxable, which means that many people effectively lose money on cash deposits.
Online savings accounts were typically paying 7.3 per cent interest in August 2008 and today pay 1.65 per cent, RBA figures show.
Bonus saver accounts have dropped from 5.5 per cent to 1.9 per cent, 12-month term deposit rates have dropped from 8.25 per cent to 2.25 per cent.
AMP Capital chief economist Shane Oliver said savers waiting for a rebound in rates “will probably be waiting a while”, perhaps until 2019.
“We are probably in an environment where the official cash rate and therefore bank deposit rates go sideways for another 12 months,” he said.
The RBA is almost certain to keep its official cash rate on hold at 1.5 per cent when it meets next Tuesday.
Dr Oliver said before switching money to higher risk investments such as cash and income funds, people should ask themselves if they “could stomach any volatility at all”.
He said global financial markets were entering a traditionally difficult period, US shares were at record highs, the US debt ceiling could cause problems, and there was uncertainty around North Korea.
“History tells us if (US markets) come down we tend to go down by a bit more.”
Planning for Prosperity senior adviser Bob Budreika said some retirees and savers were “ready to jump” into higher-income investments, but should first consider when they might need the money.
For time frames less than five or six years, cash was still the best, he said.
“You get to a point where you think I’m going to run out of money unless I find a way of increasing that return.”
However, years of saving for a home deposit could be unwound by one short-term share market slump.
“If their $50,000 home deposit goes down 20 per cent they’ve only got $40,000 and they’re not going to have enough,” Mr Budreika said.
Originally published as Rate slump creates risky savers