The Catch with High Interest Bank Accounts
There are various types of saving accounts offered in the market, with varying features and interest rates. These accounts have different terms and conditions which you should understand clearly as they can have a great impact on your saving goals and how slowly or quickly you achieve these goals.
It is vital to understand the underlying features of these saving accounts so you are not ended up with a much lower interest rate after an initial higher interest rate. Many banks and financial institutes offer accounts with higher promotional rates which seem to be too good to be true but many investors, unknowingly the honey moon period, invest in these accounts.
These promotional, also known as maximum variable rates, offer higher interest rates for an introductory period of generally 4 months. These higher rates are referred as honeymoon rates which make most of the investors fall into the trap of honeymoon rate. This rate continues only for a few months and then you end up with the standard variable or base rate.
The standard variable or base rate is the rate which begins after the honeymoon period ends. Most of the banks offer a rate which has both honeymoon and standard variable rate added to attract a large pool of investors.
Here is an example how it works:
For example, the Westpac offers an eSaver savings account with a headline rate of 2.95% per annum; whereas this rate includes both honeymoon rate of 1.45% per annum for the first three months plus standard variable rate of 1.5% per annum. Thus, after the honey moon period ends, you would only get 1.5% per annum, if you did not know this before, this may put you in a worse-off position.
Investors who open an account with promotional rate must be well aware of the duration of honeymoon period so that they should know in advance what and how much to expect after that period. A honeymoon period of 3-4 months is a good deal if you need more money in the short run, and then you can continue with the base rate to meet your saving goal for the rest of the investment period.
Thus, the concluding point for prospective investors is ‘never be fooled with the headline rate’. While opening an account, the headline rate should be used for a reference only. You should be well aware that this rate is going to end within a few months.
Therefore, while deciding among various accounts in the market, preferably go with the account which offers higher base rate, so you should not be seduced by the promotional rate, or go with a higher honeymoon rate but with reasonable base rate which meets your saving goals in the long run.