Rate cut good for borrowers, but savers have some thinking to do

The cut in interest rates last week was a good story for mortgage holders, but now what for savers? With the cash rate at 3.75%, what do Australia’s retirees and near-retiring workers do? The 0.5% rate cut is money saved for mortgage holders, but it’s less income for those relying on cash deposits, term deposits and fixed-income products. And in this country savers outnumber mortgage holders by almost three to one.

Savers have some thinking to do, especially if we have a minor recession and the Reserve Bank cuts the cash rate again to kick start economic activity.

The banks are in the process of adjusting down their mortgage rates, which will take effect over the next few weeks, pushing down their cash and term deposit rates, which will happen immediately.

For those in retirement or close to it, shares and property carry liquidity and market risk that they’d rather not take on.

For this large cohort of people, the choices come down to putting your money in a transaction account, a designated high-interest savings account or a term deposit.

Let’s start with the last one. As the banks cut their deposit rates, you’ll notice more movement in some types of term deposit than others.

The average 12-month TD rate at banks will drop to around 5.25% and the 30- and 60-day TD rates will on average drop to around 5% or less.

Right now the sweet spot is going to be the 90- and 180-day term deposits, which will settle at at around 5.3 to 5.5% in the next two weeks.

Banks have a need of intermediate funding right now, so they will bid for your money by making offers on 90- and 180-day term deposits as attractive as they can.

However, it’s always worth looking around for alternative deposit opportunities, such as something like Yellow Brick Road’s Smarter Money trust, which is returning about 6% after fees. Your goal should be to have a spread of investments to diversify your risk.

If you’re not comfortable with shutting your money away for a set term, you’ll either be looking at keeping your money in a transaction account, where you normally get zero per cent, or an online savings account where the 12-month average return is around 4.5%, perhaps over 5%.

I make two points about these options. Firstly, earning zero per cent in a transaction account is not smart because with inflation running at around 2.5%, you’re going backwards.

Secondly, when investigating “bonus interest” offers at an online savings account, the institution may offer you between 5.5% and 6%, but the rate will apply for three or four months, at which point it drops to around 4.5%.

There are going to be some good deals out there in the next month. Your job is to be informed not only about the market, but also about your own needs.

Mark Bouris is executive chairman of Yellow Brick Road, a financial services company offering home loans, financial planning, accounting and tax, and insurance. He runs a Q&A session on Twitter every Monday afternoon at 4pm for small business owners using the hashtag #bizQandA.