Waiting for higher deposit rates? Don't hold your breath
August 21, 2013
Is the era of low interest rates over? It depends on which interest rates you're talking about.
Mortgage rates, for example, have been very much on the move. According to data from Freddie Mac on 30-year mortgage rates, from early May to early August these rates rose by more than a full percentage point.
In contrast, savings account rates have been stuck in the mud. The FDIC reports that as of early August, the average interest rate on savings accounts was about where it was in early May.
The contrast between rising mortgage rates and stagnant savings account rates is bound to be another frustration for deposit customers. Here's why savings account rates have been slower to move, along with suggestions on what you can do about it.
Why savings accounts have been slow to change
The difference between the actions of mortgage rates and savings account rates is rooted in some market realities:
- Interest on savings accounts is a cost; interest on mortgages is revenue. Banks set rates on products partly in response to the marketplace, and partly based on their own profit motives. Looking at it from the bank's point of view, which would you raise first: savings account rates that cost you money, or mortgage rates that make you money? Think about how prices at the gas pump are quick to rise when oil prices go up, but are much stickier on the way down. A similar dynamic is at work with bank rates.
- Savings accounts are short-term; mortgages are long-term. Long-term rates are generally quicker to react to marketplace changes because they have to anticipate the future. This helps explain why on-demand account rates haven't moved, while 30-year mortgage rates have.
- Banks have little incentive to attract deposits. When lending business is slow, banks have less need for deposits to help fund their lending activities. That's why deposit rates may not rise until the economy picks up.
What you can do about it
As frustrating as low savings account rates may be, don't grind your teeth over it. Instead, here are three things you can do to try to move rates a little bit in your favor:
- Actively compare rates. There are already large differences between rates at different banks, and these differences may widen once rates start to move.
- Look at online banks. On average, online banks have consistently offered higher rates than traditional banks.
- Look into CDs with mild early withdrawal penalties. It may be time to get creative. For example, earning higher rates on long-term CDs by finding ones with relatively mild early withdrawal penalties might allow you to come out ahead even if you decide to take the penalty after a year or so.
Deposit accounts may be slow to react to the rise in interest rates, but that doesn't mean you have to be slow to take your own initiatives.