Why Mortgage Rates Are Rising But Interest on Savings is Not | Featured story
Why are you getting virtually no interest on your savings?
After all, mortgage interest rates are almost twice as high as they were at the start of the year, largely thanks to the Federal Reserve’s decisions this year to raise its key rates.
Yet the interest you get on your CDs and other accounts might barely exceed a quarter of 1%.
What is happening here?
“Rates on CDs and other bank accounts reflected banks’ operating costs while lending rates reflected banks’ revenues. To maximize their profits, banks would raise lending rates fast and CD rates slowly,” said Tenpao Lee, professor emeritus at Niagara University in New York.
DespositAccounts.com estimated that the average one-year certificate of deposit last Tuesday offered an annual percentage yield of 0.68%.
Shop around, he says, and you might find an APY of 3.21% with a minimum of $5,000. An online bank offered a 13-month CD with a minimum of $500 at 3.1% APY. For a smaller deposit, the highest APY was 2.7%.
DepositAccounts found money market APYs averaging 0.22%, but as high as 2.6% with a minimum of $2,500 in online banking. The best APY for a balance below $1,000 was 2.5%.
Most personal savings account rates at local bank branches in the Sacramento-Stockton-Modesto area tend to be below 0.05%.
Slow savings rates are nothing new.
“Savings rates will never rise as much as the Fed has raised overnight rates,” said Anthony Valeri, director of investment management at California Bank and Trust.
All rates are well below mortgage interest rates, which for a 30-year fixed rate loan were 5.92% on Tuesday, according to Bankrate.com. At the beginning of this year, the average rate was 3.4%.
This increase is underpinned by the actions of the Fed on interest rates. It raises its federal funds rate, its key rate, in an effort to bring inflation down. There have been four increases this year, starting near zero and now in the 2.25% to 2.5% range. The next increase is scheduled for the end of September.
That should mean higher rates for savers, experts said, although they are unlikely to come close to matching lending rates.
“They’re more behind the times than they were in the past,” said Ken Tumin, founder and editor of DepositAccounts.com.
One of the main reasons is that banks need deposits less than usual. During the COVID-19 pandemic, people tended to save more money, so even today banks don’t always need to entice people to deposit more funds by offering interest rates higher.
Another reason: “Lending rates have risen faster than deposit rates, so banks may see some recovery in their margins,” said Greg McBride, chief financial analyst at Bankrate.
The good news is that savings rates will go up.
“Savings rates are going up, if you’re looking in the right place. Small banks and online banks that are hungry for more deposits have increased their remittances and that has grown as the Federal Reserve has raised interest rates,” McBride said.
Lee saw savers’ rates rise by one percentage point, “slowly through the end of the year.”
“As long as the Fed continues to rise, you will see savings account rates continue to rise,” Tumin said.
Valeri said rates should continue to rise from now until the end of this year until early 2023. The exact rate will depend on how high the Fed decides to raise overnight interest rates, a he declared.
If the Fed raises interest rates to 3% to 4%, Valeri said it’s possible people will see savings rates go up to around 2%. But that’s a rough guess.
Tumin advised looking to online savings offers for higher rates, as their costs tend to be lower than brick-and-mortar institutions.
Valeri recommends that you choose a bank that you are comfortable with. Some Internet banks don’t offer specific services, he said, so it’s a compromise.
McBride finally saw some promising news. Rates will rise, he said, and if the Fed is successful, the inflation rate will decline from the 8.5% annual rate recorded last month.
“The Federal Reserve will continue to raise interest rates, which means a brighter outlook for savers,” he said. “The most competitive savings account rates will continue to rise and inflation will eventually come down significantly.”