Commonwealth Bank boosts its savings rate — CBA’s January cash double-surprise — explained

CBA slashed its January introductory saver’s rate. But Sally Tindall, director of research at RateCity, warns that new consumers should be mindful of a 2.40 per cent once the honeymoon period ends even if the price seems sweet.

Experts have warned that there is a huge catch to Commonwealth Bank‘s announcement that it would increase the introductory rate for its most used saver account, NetBank Saver.

After the first five-month period, the rate drops to 1.60 per cent from 4.0% offered by CBA, the steepest introductory cost among the four major banks.

According to Canstar group executive of financial services Steve Mickenbecker, the decision is “out of sync” with the Reserve Bank's recent rate rises and an attempt to recruit new clients.

A long-awaited ray of optimism for savers has appeared in the form of CommBank's boost to its savings rate, which occurred out of sync with rate hikes by the Reserve Bank.

If the largest bank in the nation is actively seeking deposits, savers may have reason to hope for a greater part of future growth. There has been a flood of funds into the banking system, to fight against the banking recession, but eventually, they will have to compete for depositors.

Study the small print: Reduction of 2.40 per cent once the honeymoon period ends

Companies throughout the United Kingdom, United States, and the EU are laying off workers in an effort to save cash during the current economic downturn, and the information technology sector and Wall Street have been particularly hard hit.

Rising interest rates, declining consumer demand, and a slowdown in China's economy have all led to mass layoffs at companies like Walt Disney, Amazon, Meta, and American banks.

More than 150,000 employees in the IT sector are expected to lose their jobs in 2023, according to layoff analytics, as the demand surge brought on by the pandemic soon fades.

It is expected that there will be further layoffs as growth slows in the world's top economies.

Sally Tindall, director of research at RateCity, warns that new consumers should be mindful of a 2.40% reduction once the honeymoon period ends even if the price seems sweet.

Customers should study the small print before jumping at CBA's new intro rate of 4%, she said.

Some clients may be surprised to learn that the rate drops to rock bottom after the first five months.

In Ms. Tindall's opinion, now is the “perfect moment” for savers to shop about for the best offer to get the most out of their money.

She said that if your current bank is unable to provide you with a new client rate, you may want to consider moving your money to a rival institution that would.

According to RateCity, the highest continuous savings rate is 4.75% with Bank of Queensland's Future Saver, followed by 4.60% with Virgin Money's Boost Saver and 4.55% with ING's Savings Maximiser; but keep in mind, there are monthly T&Cs with each of these accounts.

How savings rates work: Savings rates explained

It is important for savers to understand how interest is calculated on savings accounts so that they can maximise their returns. 

If you have money in a savings account with a bank or other financial organisation, you may earn interest on that money. When a bank makes loans using depositors' money, it is effectively borrowing from those depositors. 

Banks provide savers with interest on their account balances while charging borrowers a rate that is greater than the interest the bank pays savers. How savings rates work: 

• Having interest accrue on an emergency fund over a sufficient time period may be a great help in a pinch.
• Interest accrued on a compound interest basis is based on both the 1) principal (what you put into the account) and any 2) interest that has accrued since the beginning of the period.
• Interest rates on savings accounts are reported by banks as annual percentage yields (APY), which factor in compounding.

Your savings will become even larger in the long run if you reinvest both the interest you've accrued and the principal you've put in. 

It's termed “compounding” because you get interest not just on your initial investments but also on the interest you've earned in prior periods. In order to save money and amass a fortune, investors need to understand the power of compound interest.

Savings account interest is often stated as a percentage of the account's balance. In the event that you have £1,000 in a savings account, for instance, you may get 1% interest. Due to historically low-interest rates, most banks now pay less than 1% return on savings accounts.

Power of compounding interest: What compound interest can do for you

To understand how savings rates work, you need to understand compound interest. You can choose to have your interest compounded in your savings account every day, every month, or every three months, at which time you will begin earning interest on the interest you have already accrued. 

If interest is applied to your savings on a regular basis, your money will accumulate much more quickly. By applying daily compounding to our initial £1,000 investment, the interest-bearing balance will increase by an additional 1/365th of one per cent every day. By year's end, the deposit has increased to £1,010.05 from the initial £1,010.

Even while an additional £0.05 doesn't seem like much now, after 10 years your initial investment of £1,000 would have grown to £1,105.17 thanks to compound interest.

Your money has increased by more than 10% thanks to the 1% interest rate that was compounded every day for a decade.

While this may not seem like much, think about what would happen if you put away £100 a month for a year and ended up with an additional £1,000. With an interest of £16.05, your account amount after a year would be £2,216.05. If you put aside just £100 every month for 10 years, you would have saved £13,725.50 (or £725.50 per year).

Takeaway

Traditional banks are facing strong digital bank competition, e.g. Starling and Monzo. 

If you're looking for a great interest rate in Australia without having to worry about fees every month, ANZ and Bankwest provide the best options, both at 3.75 per cent.

Among the main banks, the highest interest rate is offered by Westpac's Life account at 3.75 per cent, followed by CBA's GoalSaver and NAB's Reward Saver, all of which provide interest rates of 3.25 per cent.

See our best-interest UK bank guide, for British banks with the best compound-interest savings accounts…