Avoiding the Savings Bonus Rate

Avoiding the Savings Bonus Rate

Banks these days are finding it difficult to borrow money from other banks because of the credit crunch. They need the money to shore up their liquidity. They have turned to the general public to attract more cash deposits, and they’re using bonus savings rates to provide the come-on.

Since ongoing savings rates have declined in line with the Reserve Bank of Australia’s official base rates, you will find banks offering very attractive bonus rates. It is only natural for you to consider putting money in these high interest savings accounts, but there is one thing to keep in mind: a bonus is not a permanent thing, and the same is true for bonus savings rates.

Banks use bonus savings rates as a short-term marketing tactic to attract your money. At the end of the period, when the bonus rate expires, the banks hope that you will keep your money deposited with them.

The thing to remember is that after the bonus rate period, the standard savings rate prevailing at the time of expiry will then apply. That new rate will be substantially lower, and the drop in interest payments to you can be significant. Some bonus rates are fixed for the period, but some other banks offer a variable bonus rate.

For instance, back in the middle of 2008, a BankWest high interest savings account offered an 8.5 per cent bonus rate. But this was due to end at the start of 2009. At that stage, the natural tendency for a depositor would have been to assume a fixed bonus rate until the end of the offer period. In fact, it was a variable bonus rate and was subject to review each month to follow the RBA base rate.

To be sure, BankWest did mention in its website that this was a variable bonus rate offer. Many depositors did not realise that, however. Banks like ANZ and ING Direct fixed their bonus savings rates until the bonus offer period ends. The NAB had a different way of presenting their bonus offer: it stated a fixed bonus rate margin on top of the current prevailing savings rates (which varies with the ongoing base rate).

The trick, then, is to check whether the offered rate is fixed or variable. In evaluating variable bonus rate offers, you need to determine further the exact marginal rate for the bonus. This margin rate will combine with your own reading of how the base rate will move. You can then compare that combined rate with the fixed bonus rate offer.

It is also important for you to make a note of when the bonus savings rates offers will end. At the appointed time, you will have to think about where to put your money. One option would be to switch to another bank with an ongoing bonus savings rates offers.

But if constantly moving deposits is too laborious, then you can look for a high interest savings account that may offer savings rates lower than one with a bonus rate but assures you of a consistent payout for a longer time rather than an out-and-out windfall for a short period only.

In short, if you wish to take advantage of high savings rates offers then remember to take note of the fine print to avoid losing out.