How do high interest savings accounts work?

Savings accounts are specifically designed to help you save money, therefore most of them don’t charge maintenance fees and give you higher interest to help you reach your goals sooner.

You’ll be able to start earning compound interest – where your interest earns interest – the moment you put money into your account. The highest interest rates are usually made up of a base rate and a special rate.

Interest is expressed as a per annum (p.a.) percentage figure, and is usually calculated daily and paid monthly.

Conditions always apply, which could include a minimum monthly deposit amount or monthly withdrawal limits to attain the top interest rates.

What features should I look for in a high interest savings account?

1. Competitive interest rates – base and bonus
One of the most important features to look out for is long term competitive rates. Many savings accounts entice you with an introductory offer, but then revert to a standard rate once introductory period is up. These can be useful, but an ongoing rate might be what you’re after, to avoid jumping around every few months.

Many of the top savings account rates come with a base interest rate and a bonus rate. The base interest rate is usually quite low, and you need to fulfill certain bonus criteria to get the rest of the interest rate. Criteria could include minimum deposits, no withdrawals, growing the balance, and so on.

It’s worthwhile looking for a high-interest savings account with deposit conditions you can realistically achieve.

2. No account fees
Many savings accounts don’t charge monthly or annual fees. Some banks still charge monthly account keeping fees if you don’t deposit a minimum amount per month. Ideally you want to find a bank that doesn’t do this at all.

Another relatively common fee could include one for withdrawing more than a certain number of times per month. It is important to know what other fees you may charged, as there may be transaction fees for ATM or over the counter withdrawals.

3. Automatic transfers
You may be required to maintain a certain monthly balance in order to receive the highest interest possible. The easiest way to ensure that you do this is to set up automatic online transfers, so you know the minimum repayment is being made each month without fail. This could be made from a linked transaction account or from a totally separate bank account.

4. Part of the New Payments Platform & Osko
The New Payments Platform (NPP) – of which Osko is part – allows near real-time transfers between banks. What used to take days now takes seconds. This can be handy if you’re trying to transfer a large sum of money to your savings account and don’t want it sitting in limbo for ages. This can be done any time of day and on weekends. While most banks have signed up to the NPP, some have not. You can check if your bank is taking part here.

5. Able to split savings into buckets or goals
If you have multiple savings goals – such as for a house, a car, a holiday or wedding – it can be handy if your bank allows you to split the savings account into separate buckets or sub-accounts. Some banks allow up to 10 separate buckets, and you can label them according to your goals.

Having separate buckets can help you prioritise and stay motivated on your savings journey. Keep in mind that if the account has a maximum deposit limit on the highest interest rate – say $100,000 – it will likely apply to all the accounts, not $100,000 for each one.

Things to consider with high-interest savings accounts

1. Deposit requirements
Many of the top savings account interest rates require a bit of legwork to get there. This could include depositing a certain amount per month – this is usually anywhere from $50 to $2,000. If you don’t you’ll likely receive the base interest rate, which is generally much lower than the total rate.

Some don’t stop you from withdrawing that amount straight away. However, if you’re a student or on a low income, you might find it difficult to move this money around.

2. Honeymoon periods
Many attractive interest rates are actually attached to intro or honeymoon accounts. These accounts offer an enticing interest rate that expires after a few months – usually three or four. The rate then reverts to what’s usually a much lower one. If you want an ongoing rate, double check to make sure it’s not an intro rate.

Pretty much all interest rates on savings accounts are variable however. Just because you’re on an ongoing rate doesn’t mean it’s guaranteed. Market movements could push your rate down – or up.

3. Deposit limits
Many of the highest earning savings accounts have deposit limits. For example, the top rate could apply to only the first $50,000 or $100,000. After that, another lower rate might apply.

If you have a lot of cash, it could be worthwhile picking a lower rate that applies to a higher balance, than a higher rate but a lower balance. Also keep in mind the $250,000 Government deposit guarantee. If you have more than this saved up in cash, it could be worth spreading it across different banks.

4. Other restrictions
To attain the highest interest rates, on some accounts you might be required to sign up to a linked transaction account and make a certain number of purchases. You might also need to grow the account balance i.e. no deposits then immediate withdrawals. You might also need to make zero withdrawals. These can be handy as a form of forced saving, but if you want flexibility, it does mean you might be punished with a lower rate if you don’t meet the criteria.

Other savings accounts might be restricted to age, for example under 18s, or under 35s. It’s no use signing up if you’re 50!

5. Savings interest is taxable
Any interest you earn from the savings account is taxable as regular income. This means you will need to declare it, or if you are using MyGov to do your tax return, it’s likely to be pre-filled.

If you earned $60,000 from your job, and $500 in savings interest for the year, you’d be taxed on a total of $60,500. This is provided you supplied your Tax File Number. While not mandatory, doing so means you’ll be taxed at the highest marginal rate through the year, and you’ll get the balance after the taxman processes your return. Do you really want to give the government a free loan for the financial year?

How can I get the most out of my high interest savings account?

1. Meet the requirements
Check if there’s a special rate that’s available to you provided you meet the requirements. These requirements could be as simple as not making any withdrawals for the month or making sure the minimum monthly amount is being deposited on time. You’ll want to make sure you’re able to hit these requirements, because the base interest rate can be much lower if you don’t.

2. Resist the urge to dip into the savings
It’s tempting to dip into your honeypot for an expense here or there, but it can add up over time. Some high interest savings accounts’ restrictions essentially make it punishing to dip into your savings.

This is why having different sub-accounts with buckets for different goals can be handy. That way you can keep your eye on the prize – house deposit, car, wedding or holiday – and resist the urge to use your savings on a night out you’ll forget in a week’s time.

3. Contribute to it regularly
If you have any money sitting in an account that isn’t needed in the near future, put it in to a savings account to help boost the interest you will earn. The more you have, the more interest you will earn because your interest is calculated as a percentage of your account balance.

Depositing regularly – such as when your pay comes in – can also yield better returns because it compounds. This means your interest earns interest. Even if it’s $20 or $50, it’s better than nothing.

4. Supply your Tax File Number (TFN)
While not mandatory, not supplying your TFN means your savings interest will be taxed at the highest marginal rate. This essentially means the government keeps that money until you do your tax return.

How to open a high interest savings account

Applying for a savings account is an easy thing to do, with savings accounts available to pretty much anyone who’s considered an Australian resident for tax purposes. However, consider the following before choosing which account best suits your needs:

1. Select an age appropriate account
If you’re under 18, look into kids savings accounts as they have special offers to help you get started when you have a smaller amount of savings to start with. Conversely, it’s no use signing up for a junior savers account if you’re 50 years old – you won’t earn the top interest rate.

2. Minimum deposits
Most accounts can be opened with a very small amount of money, but some may require a minimum monthly deposit from you – usually anywhere from $200 to $2,000.. If that is the case, determine how much that might be and if it’s within your budget. And also consider if you can realistically achieve that every month.

3. Online applications
Many of the top savings accounts with the highest interest rates come from banks that don’t have any branches. This means you’ll probably need to open it up online. Some banks have also gone one step further and made the special interest rate available only when you use their app.

4. Information needed
As with all accounts you’ll need a few details in order to apply, including your contact details, personal details and identification. If you have a transaction account that you would like connected to the savings account, be sure to have those details available too. A Tax File Number is also handy when opening it up, but if not, you can input this later.