Rate cuts on bank accounts and term deposits hurt retirees

HISTORICALLY low rates have been good for home owners, but there are fresh warnings about their impact on retirees and young savers.

Australian money and scissors

FALLING interest rates on bank deposits are crunching the incomes of older Australians and making life tougher for young savers.

As the mortgage belt benefits from a record run of steady home loan rates, new Reserve Bank of Australia data shows banks have been winding back the generous deposit rates they offered immediately after the global financial crisis.

RBA figures show that since its last official cash rate cut in August 2013, the average variable mortgage rate has not moved. However, bonus savings account interest rates dropped 0.5 percentage points to 3.55 per cent, three-month term deposit rates fell 0.4 percentage points to 2.75 per cent, and one-year term deposit rates dropped 0.3 percentage points to 3.2 per cent.

Term deposit interest rates have almost halved in the past four years and the chief executive of seniors group COTA Australia, Ian Yates, said this had increased the pressure on people who relied on this income to fully or partially fund their retirement.

“It’s a big challenge. It means that people have to think about putting their savings into other financial instruments, but if they’re not experienced how do they do it?” he said.

The RBA kept its official interest rate on hold this week at 2.5 per cent, and some economists believe it may make one or two cuts in 2015, which would further benefit borrowers and slug savers. About one third of Australians have a home loan, and RBA data shows that more money is held in savings accounts ($1210 billion) than home loans ($927 billion).

For every $10,000 someone holds in savings, a 0.5 per cent interest rate fall costs them $50 a year.

AMP financial planner Mark Borg said young people saving for a home were also affected, but not as much as seniors.

“The retirees are hit the hardest in this environment. They were living off the interest income but now their income has reduced markedly,” he said.

Some retirees are diversifying into riskier investments such as shares in their hunt for extra income.

“Term deposits have the lowest risk, but the increase in risk may be disproportionate to the amount of extra income you can get. There are securities offered by the banks that provide a significantly higher interest rate,” Mr Borg said.

An Australian Bankers’ Association spokeswoman said deposit rates were still “significantly higher than they have been, relative to the cash rate”.

“We have seen falls on mortgage rates, particularly for fixed term loans, as the costs of some term funding for banks has eased. Overall though, the net interest margins earned by banks are at historic lows,” she said.

Originally published as Rate cuts on bank accounts and term deposits hurt retirees