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
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
Savings accounts are short-term; mortgages are
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
, 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
It may be time to get creative. For example, earning higher rates
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