Dubai: If you’ve seen adverts for savings accounts that have touted unusually high interest rates and felt suspicious as to why only a few banks can afford to offer such interest rates and not others, your doubts are most likely justified. Here’s why.
When looking closely at such unrealistic offers, you may have also discovered that it isn’t quite what it seemed to be initially. For instance, they may require a monthly contribution, the rate may include a bonus only for the first year, or the rate is applicable only if you lock up money for a given term.
“It’s not that there are absolutely no good interest rates out there to be found, it just pays to be careful when you are shopping for a place to park your cash,” said Anil Pillai, a Dubai-based banking analyst. “It’s the small print that you really need to look at more closely.
“If high interest rates on savings accounts are to be believed, you would find that in most cases you need to be prepared to give up something else in order to get them – whether that is access to your cash, a good rate for an extended period of time or something else.”
If high interest rates on savings accounts are to be believed, you would find that in most cases you need to be prepared to give up something else in order to get them
High interest rates on savings accounts come with conditions
Here are some of the conditions or pre-requisites you would come across when looking closely at the fine print of savings accounts with suspiciously high rates:
1. ‘High savings rates are conditional on you having to deposit a fixed amount every month’
“In order to reap the benefits of a savings account that offers high interest rate, you may most likely be required to contribute an amount each month to your account,” added Pillai.
“While ideal if you've got a handle on your cash flow, if you’ve got a good budget and you know how much cash you’ve got left over each month. But if you struggle to put away the same amount each time (or you even miss some months altogether) it’s no good opting for this kind of account.”
2. ‘The high interest rate is time-bound and comes in the form of a bonus amount’
With these so-called high-interest savings accounts, you may be offered a specific time period when you can benefit from a better rate of interest, explained Jose Paul, an Abu Dhabi-based banker with over two decades in the field.
“Apart from being time-bound, they very often have few other limits and they allow you to take out your cash whenever you want to. If you do opt for this kind of account for that rate boost in the beginning, ensure you mark the date and move your money elsewhere when the intro rate expires.”
3. ‘You don't get the stated interest unless you lock up your money for a given term.’
Another instance of one such high-interest account is one that only pays out the advertised interest if you deposit your money and don’t touch it for four or five years.
“An account that offers high interest on your savings isn’t wrong, in principle, when they seek to lock-up your funds as this benefits you if you are willing to tie up your money for that long, but you wouldn’t choose this kind of account as your main savings account,” noted Paul.
“You should only consider it if you've already got a designated account that gives you more liquidity and that perhaps, contains your rainy day money. If this is the case, you can enjoy getting a better rate of interest on any cash you are willing to tie up for a few years.
“At times, this type of fluctuation can help if rates are going up. But what if the trend is downward? If the rate is the reason why you’re choosing the account, you may be let down later when you find that the account’s rate changes quite a bit over time,” he added.
Verdict: Why you should give your savings account a second look
If you prefer to choose an account that still offers a high yield with or without the add-on bonus, also look at savings accounts that have other perks like if they are part of an institution that has a great reputation, has a brokerage arm and has other interesting investment products to offer, etc.
In order to get the best interest rate on your savings account, it’s best to first understand what’s considered competitive in the current interest rate environment, and compare rates at multiple brick-and-mortar banks and online banks.
Experts suggest that you could also look at online or digital-only banks as they tend to offer better rates, higher yields and lower fees. Because they don't have branch buildings to maintain and have lower staff costs, online banks typically pay higher interest rates on deposits.
While big banks typically don’t pay high rates, they can offer additional perks for loyalty rewards, such as for using other bank services or keeping a high balance across accounts at the bank. But, if you do pursue adverts of high interest savings accounts, don’t forget to factor in the fine print and conditions that come along with them. Such accounts are most likely not what they seem as banks most often can’t afford to hike the rate on savings.
