Income options for savers hurt by Reserve Bank rate cuts

Falling interest rates are mean many savers have to start thinking strategically. Picture: Getty Images

The Reserve Bank of Australia’s interest rate cut is piling pressure on savers and retirees, prompting many to consider other ways to maintain income as returns from cash erode.

Tuesday’s cut is the third this year, and many economists tip two or three more to come, but the good news for savers is that the RBA cash rate is unlikely to return to the ultra-low 0.1 per cent it sat at between late 2020 and May 2022. The cash rate now sits at 3.6 per cent after Tuesday’s cut of 25 basis points.

The current rate-cutting cycle could effectively lower deposit interest rates by 1.5 percentage points in total, shaving $150 a year in interest off each $10,000 held in cash.

Financial specialists say there are other options, but some require taking on extra risk.

RateCity director of data insights Sally Tindall said when the RBA cut rates the entire country seemingly sighed in relief, “but in fact what you’re hearing from millions of Australians is actually a groan”.

“While one-third of households have a mortgage, the remaining two-thirds either have savings or would like to have savings in the bank … anyone from a young person saving up for their first car to a self-funded retiree who relies on the interest they earn to pay for essentials,” she said.

Ms Tindall said competition in the savings sector was cooler than the mortgage market, but chasing down a competitive rate remained important.

“While we’re unlikely to see any rates starting with a 5 in a few weeks’ time, savers should still be able to get an ongoing savings rate of 4.5 per cent or more, provided they’re willing to jump through a few hoops,” she said.

“With around 300 different accounts in the market, savers are typically better off picking an account that suits their finances rather than chasing bonus conditions each month they can’t achieve with their eyes shut.”

Bank deposits are the safest place for cash, with the federal government guaranteeing $250,000 per person per institution, but an alternative risk-free strategy can help people with mortgages, credit cards or other debts.

As interest rates fall, diverting cash to debt makes more sense financially, because mortgage interest is higher than deposit interest, and cash income is taxable.

Ms Tindall said many Australians embraced this strategy, stashing $307bn in offset accounts – a record high.

The benefit is bigger with credit cards, as savings might pay 4 per cent interest but a card charges 20 per cent.

Tribeca Financial chief executive Ryan Watson said using cash deposits to reduce credit card debt “will have a significant positive effect”.

Mr Watson said people should shop around for the best deposit deals, “as most banks provide high introductory saver interest rates”, and some could consider increasing their investment risk through ETFs or managed funds.

Others may consider alternatives including bonds, private credit and mortgage funds, although some recent collapses highlight the risk of diversifying beyond cash.

“When chasing increased investment returns you always need to balance this with the amount of risk that you are comfortable with,” Mr Watson said.

“With something like private credit, you stand to earn a greater investment return but this is all relative to the greater risk you would be taking by investing in this market.”

Gaby Rosenberg, co-founder of fixed-income app Blossom, said RBA rate cuts were shifting attention to other income-generating assets, with bonds offering yields of 5-6 per cent or more per annum “with relatively low volatility and strong liquidity”.

“Private credit is typically associated with higher yields, often above 6 per cent per annum, though it usually comes with greater credit risk and reduced liquidity,” Ms Rosenberg said.

“Private credit could face headwinds as rates decline, with new loans being originated at lower spreads while existing portfolio yields compress from falling benchmark rates.”

Schroders fund manager, fixed income, Helen Mason said investors were looking for new opportunities to “defend income within portfolios as term deposit rates roll off and reset significantly lower”. This could be below 3 per cent, she said.

“However, solid income opportunities remain, even as bank hybrids roll off,” Ms Mason said, adding that people were seeking alternatives within the Australian credit market.

This article first appeared in The Australian as Income options for savers hurt by Reserve Bank rate cuts

Interest Rates