Diana Clement: It's in your interest to get better return from banks

Banks love bonus saver accounts as customers are pretty bad at being disciplined and most of us end up with the pathetic base rate. Photo / HOS

Squeezing the last dollar out of savings ought to be a contact sport. I'm a great fan of playing the banks at their own game and ensuring they pay top dollar for my dosh.

Many Kiwis have money languishing in accounts paying less than 1 per cent. With little more than a few minutes' work they could be picking up 4 per cent with ease on instant access savings and well over 5 per cent for 12 months.

The first step is to do a stocktake of your cash investments - including regular drip-fed savings. Then decide if you need your money at a day's notice or if it can be locked away.

Once you've decided that, it's time to go shopping by first comparing rates on websites such as interest.co.nz and depositrates.co.nz and then checking out the terms and conditions. Or if you're time- or energy-poor, at least calling your existing bank to ask if you can get a better deal.

The chances are, if you don't already have one, an online e-saver will be worth its weight in gold. E-savers pay better rates of interest and the best way to use them is to either have a portion of your salary credited to it at the beginning of the month or sweep the money in automatically.

Being prepared to tie your money up for longer than a day or month often means a better return. The best rate I could find for on-call savings this week was 4.2 per cent, although with strings attached, whereas over five years, New Zealand's banks were offering up to 5.5 per cent. The big question is how long savers can afford to tie their money up.

If you hate the paperwork involved in continually renewing term deposits, then a notice saver may work better. These accounts require 30 or 90 days' notice to make a withdrawal. Heartland Bank offers 4.10 per cent on 30 days, compared with the best 30-day term deposit rate I could find of 3.75 per cent from Credit Union Central. Kiwibank is offering 4 per cent for 90 days.

Quite the opposite of hassle-free are bonus saver accounts. These accounts offer reasonably good interest rates - providing you qualify for the bonus. For example, ASB's Savings Plus Account offers 4 per cent interest, which is reduced for every withdrawal you make in a quarter.

Banks love bonus saver accounts. That's because customers are pretty bad at being disciplined and most of us end up with the pathetic base rate.

Much as I dislike such accounts, I have one with RaboDirect, the new PremiumSaver, because it's paying 4.2 per cent on instant access savings.

The conditions on PremiumSaver are that the balance increases by $50 a month. To make it work, it's essential to set up a direct debit that guarantees the balance rises by that amount.

Sometimes on-call rates are much easier. The best on-call rate I found this week without too many strings attached was from First CU, which was offering 4 per cent for balances over $1. Business customers can get 4.25 per cent on call from Heartland.

Heartland, like the Co-operative Bank, has a BBB- rating, whereas the high-street banks and RaboDirect are all in the As. Some of the credit unions don't have credit ratings at all because they have assets of less than $20 million. I'm told that no credit union in New Zealand has ever failed and that the credit unions have both internal and external trustees.

No institution, however, is ever 100 per cent safe. By all means take advantage of the rates if you think the risk is worth it, but don't put all your eggs in one basket.

If you're willing to take the risk and to do a bit of sleuthing, there are some really good rates available for savings at smaller banks, building societies and credit unions.

For example, the Credit Union Central, which is only open to customers who have lived in the Bay of Plenty Regional Council catchment at some time in their lives, pays a higher interest rate for renewals than it does for new money. Its one-month term deposit mentioned above is paying 3.75 per cent for deposits over $500. On renewal that jumps to 4.20 per cent, which is pretty impressive. A 12-month term deposit increases from 4.25 per cent to 5.25 per cent on renewal.

Aotearoa Credit Union's Christmas Club Account pays 5 per cent on regular savings. Withdrawals can be made from December 1 to January 31 each year.

One account with a real eye-opening rate - of 6 per cent over $10,000 - and available to most New Zealanders is the Aotearoa Credit Union Home Savings Account. Technically it's designed for saving for a home, but no rules enforce that. Only one withdrawal can be made a year and it comes with a $10 fee.

Savers looking to squeeze the last cent in returns from their cash should consider portfolio investment entity (Pie) savings accounts as well. The tax is lower on Pie accounts, which means the effective return is greater.

This week Heartland Bank was offering the equivalent of 4.48 per cent on cash deposits for 33 per cent taxpayers willing to invest $1000 or more. Of the big five high-street banks the BNZ was offering a 3.6 per cent effective rate and Westpac 4.35 per cent, but with bonus saver conditions attached.

Term Pies offer better rates. The Kiwibank 90-day notice saver account is, in fact, a Pie, meaning it pays 4.37 per cent for a 33 per cent taxpayer, not the advertised rate of 4 per cent. The BNZ is offering 5.83 per cent over five years. A small but important point about all savings accounts is that investors need to know when the interest is calculated and paid. The more frequent interest is paid back into an investment, the faster it will grow - with interest on interest.

Other options for higher than average interest rates include mortgage funds or debentures. The NZ Mortgage Income Trust was paying 6.75 per cent this week and the Professional Mortgage Investment Trust was at 5.65 per cent. Whatever you do make sure you read the prospectus and understand the risks with funds and debentures.

Debt securities (bonds) are also a good way to get a better return on cash because they pay a near-fixed-interest rate that is usually higher than bank deposits/savings. They're bought through the NZX's NZDX market.

There is another way of making an even better interest rate than most of those mentioned here - if you have a mortgage. That is to keep your on-call or short-term savings in a revolving credit mortgage account. The money deposited into the revolving credit mortgage reduces the outstanding mortgage capital and thus reduces the monthly interest charge. So instead of earning, say, 4 per cent on the savings, you're saving the mortgage interest rate in interest on your mortgage.

There are downsides to saving through a revolving credit mortgage. One is set-up costs and ongoing fees. Monthly fees range from zero at SBS Bank, Kiwibank, HSBC and Kookmin, rising to as much as $20 a month for the BNZ Mortgage One account. The other main downside is that revolving credit is dangerous for anyone who lacks discipline. It's easy to use the mortgage as a day-to-day spending account, gobbling up savings made.

Finally, as sure as night follows day, banks will quietly retire accounts and reduce the interest rate to a pitiful level. For this reason it's a good idea for rate tarts such as myself to review their accounts every six to 12 months.