Savings account rates vs term deposit interest rates: then and now

When you send part of your regular salary into a savings account, or lock a good portion away in a term deposit, you’re pretty much guaranteed to earn at least a little interest on this money. These products are seen as much ‘safer’ options than investing it in, say, shares, which can generate greater returns at the cost of increased risk.

Because of their relative safety (and other external factors, which we’ll explore later), savings accounts and term deposits don’t provide returns as fruitful as they once did. In fact, the current average interest rates on both are at historic lows. Let’s take a look at what the rates currently are, what they used to be and what they can be down the line.

Compare high savings account rates 

The table below features savings accounts with some of the highest interest rates on the market.

Advertisement

Savings Account (Amounts < $250k)

Product Features

• A high-interest online savings account with no monthly fees, easy withdrawals and award-winning digital banking
• No withdrawal notice periods or interest rate penalties
• Save up to 10% on eGift cards at over 50 retailers with Macquarie Marketplace

Total interest earned$1,001

4.75 % Base interest rate

5.35 % Max interest rate

Intro rate for

4

then

4.75%

More details

Important Information and Comparison Rate Warning

Compare high term deposit rates 

Looking for a good term deposit? The table below displays some of the highest term deposit interest rates available for a 6-month term.

Advertisement

Term Deposit - 11 months

Product Features

• Guaranteed rate of return
• Manage your term deposit online
• Choose your own term - Options range from one month to five years

Minimum deposit$5,000

4.85%Interest rate p.a.

11Term

More details

Important Information and Comparison Rate Warning

Current interest rates

There’s little to cheer about when it comes to interest rates on savings accounts and term deposits at the moment.

Current savings account interest rates

At the time of writing (May 2021), the highest total interest rate on the market is 3.00% p.a, but those are both limited accounts only available for younger Australians with lower bank balances. When you take away these special offers, the highest total interest rates among introductory savings accounts and bonus accounts right now is roughly 1.30% p.a, with an average less than half of that. A few years ago the highest rates you could find on savings accounts were easily in the 3% range, so it appears savings account interest rates have fallen quite drastically in recent years.

These interest rates can also change at any time, however, especially if there's a change to the cash rate, which at the moment is sitting at an all-time low of just 0.10%.

Current term deposit interest rates

Term deposit rates don’t fare much better as of 2021. According to the RBA’s Retail Deposit and Investment Rates data, the average term deposit interest rates from Australia’s five largest banks are as follows, compared to the broader market average:

Here's what these same terms used to have on average in 2018, from just the big banks alone:

• One month: 1.40% p.a.
• Three months: 1.90% p.a.
• Six months: 2.00% p.a.
• One year: 2.20% p.a.
• Three years: 2.45% p.a.

Across all terms at the time of writing, the average term deposit interest rate is just 0.30% p.a from the big banks and around 0.43% p.a across the market (the same as savings accounts).

Term deposit interest rates offer a bit more variety than savings accounts – you can see that your average interest rate increases with a longer term, while you can earn slightly more in interest depending on how often interest is paid.

Your choice of provider also has a big impact, as it does with savings accounts. Smaller banks tend to offer higher interest rates than the big boys, with the highest at the moment being well above 1.50% p.a.

Unlike savings accounts, however, term deposits offer a fixed rate. Where providers can lower savings account interest rates as they please, or offer a higher rate for a limited period of time, term deposit interest rates are locked in for the duration of your term.

Historical savings account and term deposit interest rates

If it’s any comfort at all, previous users of term deposits and savings accounts were able to enjoy higher rates!

Have a look at the infographic below to see how the average interest rates for both bonus savings accounts and term deposits with the five largest banks have changed since 2002 – this is as far back as the RBA has collected data for both.

You can see a sharp decline recently in both savings accounts and term deposits in post-GFC Australia. Where rates used to be as high as 5.45% p.a. on savings accounts and 6.20% p.a. on term deposits, they now barely reach 1.00% p.a in most cases. Not shown in this graph is how high term deposits were way back in the day. According to the RBA’s data, you could get an interest rate of 16% on a one-year term deposit in 1989.

Term deposits meanwhile have changed drastically in just a few years as well: 

Why are rates so low now?

There are a number of reasons why overall interest rates on both savings accounts and term deposits are at historical lows, but the biggest by far is the fact that our cash rate is at a record low of 0.10%, and will likely continue to be this low for some time. 

The cash rate is set every month except January by the Reserve Bank of Australia (RBA), and is a reflection of the overall strength of our economy. The cash rate is the base interest rate that banks charge each other for loans to manage their day-to-day cash needs – a low cash rate means it’s cheaper for banks to borrow from each other and the RBA, resulting in lower interest rates all around.

The infographic below shows the relationship between the cash rate and savings rates. Both savings accounts and term deposits almost follow the exact path the cash rate takes.

Remember that while savings and term deposit rates are low right now, so too are home loan rates.

Are rates set to rise soon?

Only the banks themselves will be able to tell you that. There are movements all the time, both up and down, for savings accounts as well as term deposits, but most of these moves are minor at best. Unless there’s an increase in the cash rate, it’s unlikely that we’ll see any major changes in interest rates anytime soon.

How to get the best interest rate on your savings account or term deposit

There isn’t much you can do to get a better term deposit interest rate apart from looking around for the highest one – what you see is pretty much what you get.

For savings accounts, at the moment it’s about getting the best of a bad bunch, but you can still get a decent interest rate if you do your research. Most of the savings accounts offering ‘high’ interest rates will have bonus conditions you need to meet. These can be anything, such as:

• Requiring at least $X deposited every week or month
• Requiring a linked transaction account
• Requiring at least X number of transactions to be made with your linked transaction account
• Requiring no withdrawals to be made

If a bank account is offering an extra 0.50% interest for merely linking a transaction account then that’s a pretty simple way to unlock higher interest, and you shouldn’t really be withdrawing from them too often anyway. Be mindful of bonus interest rates that are only for a limited time: there isn’t really much point to having a decent interest rate for just a few months unless you don’t mind switching often.

Pro tip: If you ring your bank and say you’re switching, they might offer you an interest rate increase. There are limits to what they can offer, but this could give you a more competitive rate. 

How much could you earn in interest?

Savings accounts and term deposits still have the potential to earn you some interest. It’ll just require a bit of patience on your behalf.

Let’s look at an example below. Three hypothetical savers here have $10,000 in current savings, and deposit $500 from their salary every month. But, each of them has a different savings account with a different interest rate…

Calculations: MoneySmart’s compound interest calculator. Compounded annually, figures not adjusted for inflation.

So after five years at 1.50% p.a, you’d have generated nearly $2,000 in interest, assuming you make regular monthly contributions. By not contributing anything to your savings account aside from the initial $10,000, your final interest tally would be $778 – less than half.

A $10,000 term deposit meanwhile, invested for one year at a 1.00% p.a. interest rate, would generate $100 in interest by the end of the term. A $50,000 term deposit would return $500 in interest. Remember, you can’t add to a term deposit like you can with your savings account, so the interest you’ll earn is much more straightforward.

These returns are nothing to be scoffed at, but they assume you’re on one of the highest interest rates available. If not, then your returns will be lower.

Australia’s inflation

One of the principal reasons for adjusting or maintaining the cash rate is to control inflation. Inflation is the rate at which goods and services increase in price over a period of time. If inflation gets too high, the purchasing power of a nation’s currency falls, as does the overall wealth of its citizens.

The RBA has set an inflation target of 2-3% since the early 90’s, and it currently sits at 1.1%.

Australia’s inflation rate over the years…

Inflation represents a problem for savings account and term deposit users at the moment because it has the potential to completely cancel out your earnings. Say you’re sitting on that bang average 0.43% p.a mark for your term deposit. At a 1.1% rate of inflation, you wouldn’t actually earn any interest on your savings account – you’ve actually lost money compared to what the Australian dollar is now worth.

If you’re sitting pretty at around 1.50% p.a, your real rate of return (adjusted for inflation) is a mere 0.4% p.a. And that's before you even have to pay tax on what you have left...

So savings accounts and term deposits offer pretty dismal returns these days, even in the best-case scenario. If you want to earn more bang for your buck, you can consider alternative options.

How do savings accounts and term deposits compare to other investment options?

If you don’t mind taking on a bit more risk, you can consider investing in either equities (shares), property or bonds. According to the 2018 Long-Term Investing Report by Russell Investments/ASX, over the 10 years until December 2017:

• Shares averaged returns of 4.00% p.a. (bear in mind this encompassed the GFC!)
• Investment properties averaged returns of 8.00% p.a.
• Bonds averaged returns of 6.20% p.a.

See also: Shares vs property vs savings.

Of course, these figures are just an average. Returns on shares can vary wildly; those who invested in Afterpay (APT) over September 2017-2018 would have made a tidy near-290% return on their investment, for example, while some stocks will drop by percentages in the tens in a single year. 

Property meanwhile tends to return slightly more on average but is harder for the average investor to get into. It can also be quite volatile too. CoreLogic reported that Australian home prices fell for more than 20 months on average (from October 2017 to September 2019), but are now at record highs, and have hit a median price of $900,000 with a 10% annual growth rate!

With savings accounts and term deposits, you’re at least nearly guaranteed to get something out of it. Other options have higher highs but much lower lows. If your bank is an ADI (authorised deposit-taking institution), and they should be if you have either of these products with them, then you are covered by the Federal Government for up to $250,000 of your deposit. 

Savings.com.au’s two cents

Interest rates on savings accounts and term deposits aren’t high. This is because, in essence, they are the most basic investment product: low risk = low reward. If serious, big-money returns are what you’re after, you might have to look to higher risk investments such as shares, bonds or property.

But that doesn’t make them worthless.

Why get a term deposit?

In the case of term deposits, Patrick Nolan, General Manager of Deposits at Judo Bank, says you might consider a term deposit as a 'simple and safe' alternative'.

"The main reason a customer takes out a TD (term deposit) over other forms of savings is a ‘fixed or guaranteed return’. With a TD the customer knows exactly what return they will receive from a deposit the moment they put the funds in," Mr Nolan told savings.com.au.

"Other investment vehicles can have a lot of variation and no guarantees of a return.

"Customers also like the simplicity of the product. I put in the money and can get my interest paid at maturity or monthly and the process to establish, fund and manage a term deposit is very easy.

"At Judo Bank we also offer a loyalty bonus if customers roll over their principal. In this way we are encouraging customers to save."

Related: Term deposits with bonus loyalty rates

Why get a savings account? 

Savings accounts also represent a lower risk, but can make for a great tool for building savings habits. You can set up automatic transfers weekly, fortnightly or monthly to selected accounts which can take a lot of the admin away from you, and some banks like ING have roundup tools on their apps which automatically send money to your savings account after every transaction.

A lot of people prefer to simply make one transfer to their savings account every payday to force themselves to save – how much to transfer is up to you.