Why savings accounts have been slow to changeThe 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 itAs 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.