Many mortgage holders would have been popping the champagne after last Tuesday's interest rate cut. The 25-basis point reduction that the Reserve Bank of Australia (RBA) announced last week was the second cut of the year, and brings the cash rate down to 3.85%.
Interest rate cuts are often universally celebrated in the media. However, they might not be welcomed by all Australians.
Falling interest rates do mean cheaper mortgages and loans. But lower rates also mean that the interest investors and savers can enjoy from cash investments like savings accounts and term deposits drops too.
This can be a hard pill for many investors, particularly those who are retired, to swallow. These investors often hold a significant amount of capital in bank accounts and term deposits, thanks to the safety and capital protection that they offer. For those Australians who are no longer working, this protection is important, as they are not always comfortable holding the vast majority of their capital in the share market.
So, what could be the top places to park your cash following the RBA's interest rate cut last week?
Interest rate cut: Where to get the best bang for your buck?
Well, to start with, this isn't 2021. You can still get a term deposit offering a decent yield in 2025, just not quite at the levels we saw at the start of the year. To illustrate, today, you can obtain a 12-month term deposit with an interest rate as high as 4.5% from select providers. You'll have to look outside the big four banks, though.
For 24-month deposits or longer, the top rate you could expect from the current market is around 4.3%.
Even longer than that, though, and rates start dropping fast. The best rate for a three-year term is about 4.1%. For a five-year term, you'd be lucky to get anything over 3.75% per annum.
There are other options, though.
You could look at a cash exchange-traded fund (ETF). These investments hold cash assets as part of an underlying portfolio. Often at slightly higher interest rates than retail banking products.
For example, the BetaShares Australian High Interest Cash ETF (ASX: AAA) currently offers an interest rate of 3.94% per annum and a 12-month dividend distribution yield of 4.4%. The iShares Core Cash ETF (ASX: BILL) has a similar story. It currently offers a trailing yield of 4.36%.
If an investor were willing to depart from cash and consider a bond ETF, the returns could be marginally higher again. An example might be the BetaShares Australian Bank Senior Floating Rate Bond ETF (ASX: QPON). Holding bonds issued by our major banks, this ETF is currently sitting on a running yield of 4.78% per annum. That's with an estimated yield to maturity on its underlying investments of 4.32%.
