Mortgage-switching is in the news again, thanks to research from the Central Bank showing that as many as 21 per cent of all mortgage holders could save money by switching their mortgage provider.
We have covered this topic extensively already, but adopting a similar switching approach to your deposits can also reap rewards.
Yes, deposit rates are on the floor, given the low global interest rate environment, which means the savings are likely to be considerably lower.
But this doesn’t mean you shouldn’t bother. Benefiting from an extra 50 basis points or so on your deposits will help you make the most of what you have. But before you look for the best rates, bear in mind that in the current environment you shouldn’t be too concerned about breaking the term of a fixed-rate deposit and you may find it is not worth opting for tax-free savings to avoid deposit interest retention tax (Dirt) at 41 per cent.
Regular savings
While rates may be pitiful in general, the best rates can be found for regular savers. As our table shows, the best rate anywhere on the market comes from
Nationwide UK
. It is paying regular savers a market- beating return of 4 per cent on regular savings of anywhere between €100 and €1,000 a month, and it will allow you make two “free” withdrawals every year.
But some caveats apply. Firstly, you have to keep your money in for 15 months (ie a return of 5.04 per cent over the full term), and if your balance exceeds €15,265 the rate drops to 1.05 per cent – and this applies to all the money in the account.
But it’s not just Nationwide UK that keeps its best rates for regular savers. KBC, for example, pays out 3 per cent on amounts of up to €1,000 a month or €12,000 a year. And if you also have a current account with the bank you can boost your return to match that of Nationwide UK, at 4 per cent.
Even Bank of Ireland, which pays just 0.01 per cent on its instant- access account, ups this to 1.35 per cent for regular savers, although this drops to 0.25 per cent on balances above €10,000. So if you regularly save money but have neglected to check the rates of late, it may be time to switch.
Saving €500 a month with Nationwide UK for example, will earn you €130 gross in interest over the course of a year. Sticking with Bank of Ireland, on the other hand, will see you earn just €43.88.
If you had €1,000 to save each month, the differential would be closer to €180 over a year.
Another option is to look for tax-free savings. With State Savings from the National Treasury Management Agency (NTMA) offered via An Post, you can earn 1.24 per cent on amounts of up to €12,500. While it may not sound significant, remember that opting for this product means you can avoid Dirt, if you're liable to it, at 41 per cent. But can tax-free savings beat a higher rate of interest?
Well, if you had put €500 into Nationwide UK’s product, at the end of the term you would have earned, as mentioned, €130 in interest, compared with just €40.30 with the State Savings product. Once Dirt at 41 per cent is deducted from your Nationwide account you would be left with €76.70, more than the €40.30 from State Savings. Hence, for regular savings, it’s worth opting for a higher rate rather than avoiding Dirt.
Of course, the challenge for regular savers is what to do with their money once the term of the regular- saver account ends. Maybe you’re saving for a particular purpose and the money will simply be spent, but maybe you have a longer-term goal in mind. While you can roll over your account and start a new term of saving at the higher interest rates, typically the balance is transferred into a lower-paying account.
For example, with EBS, at the end of the term your money is transferred into a fixed-term account, which at the moment would likely pay about 1 per cent.
Do: Maximise your monthly savings. Don't: Stick with the same provider you've always been with. It doesn't take much to switch.
Lump
sums If rates are anything to go by, banks are willing to pay more if you’re willing to lock in your savings over a fixed term. However, the one outlier is KBC Bank, which pays more (1.5 per cent
) on its instant-access account than it does for its one-year fixed account (1.2 per cent).
Indeed, putting €100,000 on deposit with KBC Bank will earn you €1,500 in interest over a year, compared with just €30 at Bank of Ireland, which pays just 0.01 per cent. However, you have to have a current account with the bank to benefit from this rate.
Other possibilities include RaboDirect, which from August 5th will offer customers a rate of 1.25 per cent for its instant-access account. The stickler is, however, that this applies only to savings of up to €50,000. Above this, the rate drops by more than half to just 0.5 per cent. If you’re willing to lock your money away for a certain period you’re unlikely to earn much more. For example, the best fixed rate over 12 months is just 1.35 per cent from Nationwide UK, which shows you’re better off opting for the higher rate – and increased flexibility – that KBC Bank offers.
This is true even over the longer term – for example, the best rate on offer for a term of between 14 and 24 months is 1.3 per cent AER, again from Nationwide UK, with many of the banks paying considerably less. RaboDirect, for example, pays just 0.05 per cent AER on its two-year deposit.
However, you might do better with your local credit union. For example, Dundrum Credit Union in south Dublin is currently offering 2 per cent on its three- and five-year special-term deposit accounts.
And, if you’re willing to put your money away for between seven and 10 years, you could do better.
Bank of Ireland, for example, pays 1.6 per cent AER (11.16 per cent gross) on its growth deposit but you have to put your money away for seven years. Similarly, you can earn an annual return of 2.26 per cent (25 per cent gross) if you put €50-€120,000 into a national solidarity bond from the NTMA’s State Savings platform. And as explained above, it is tax- free, which means that, if you’re liable for it, you can avoid Dirt at 41 per cent and boost your returns even further.
Remember that if you sign up for a fixed term but need access to your funds before the term ends you may have to pay a penalty. However, given how low interest rates are, this fee may be low if not negligible. With Nationwide UK, for example, a 90-day interest charge will apply if you close a fixed- term account early. This means that if you earn interest of €130 in a year you could be charged a fee of about €32.
Do: Remember that tax-free savings can boost your return if you're liable to Dirt. Don't: Expect to earn a higher rate if you're prepared to lock away your savings for a year or two. The alternatives: Reits, prize bonds and peer-to-peer lending If the returns offered on deposit are no longer enough to grab you, you might be looking for an alternative.
While the stock market is perhaps the most obvious avenue for your money, recent volatility may lead you to seek out some other options, so here are some alternatives.
PEER-TO-PEER LENDING Increasingly popular across the world, so-called lending clubs or peer-to-peer lending allow anyone to take on the role of a bank and lend money to small businesses.
Pioneered by outfits such as the US- based Lending Club, which is valued at about $8.5 billion, in Ireland operations such as Linked Finance and Grid Finance have sprung up, offering average returns of about 7 per cent to 8 per cent on your money for an investment of as little as €5 or as much as €35,000.
Well-known Irish businesses such as Viking Splash Tours, Leo Burdock and KC Peaches have all availed of such platforms to raise money.
Linked Finance, for example, has worked with more than 300 companies to raise more than €10 million in loan financing and it expects to increase this to about €15 million by the end of the year.
The service is somewhat akin to a matchmaking service, in that it brings together borrowers and lenders and offers an easy platform in which the money is transferred and, it is to be hoped, repaid.
Most such operators will charge a fee for this service, such as the 1.2 per cent of any amount you lend charged by Linked Finance. Pros: You can earn returns of up to 15 per cent. Cons: There is a reason why banks have always been loath to lend to small businesses: it can be risky. Hence you should maybe do some due diligence before investing any money in such platforms.
REITS First introduced in Ireland 2014, real- estate investment trusts (reits) are quoted companies that own or operate property, such as office blocks and shopping centres, and are now the primary way commercial property is listed around the globe.
With a reit you can buy shares in property companies such as Green or Hibernia that are listed on the stock exchange.
This means that they are a liquid way to invest in property and, with the property market rebounding, are a way to benefit without investing in an individual property.
Pros: They allow you to diversify a property investment, and unlike property funds, are very liquid. Cons: You will pay tax at your marginal rate (which may be higher than Dirt) on dividend income.
PRIZE BONDS With deposit rates so low, some people are looking to prize bonds, operated by the NTMA and sold through An Post, as a possible way of boosting their returns.
While prize bonds don’t pay interest, they do come with the potential of prize money. You can buy a prize bond for just €6.25, with a minimum purchase of four units at €25. Each week your bonds will be entered into a draw with a top prize of €50,000, while the last weekly draw of every second month the top prize is €1 million.
However, as many people who have held prize bonds for decades will tell you, you may never win anything. Indeed there were some 371 million prize bonds outstanding as of the end of June, and as such the odds of you winning the jackpot €1 million prize are not great.
Pros: You have the chance of winning €50,000 in each weekly draw – tax- free. Cons: There is an opportunity cost to putting your money in prize bonds – ie the amount you could have earned by putting your money into a deposit account.
