Different savings accounts come with different interest rates and ways of calculating interest, so it’s important to understand how interest works when deciding where to save your money. Savings accounts typically offer higher interest than everyday transaction accounts, while still allowing you to access your funds when you need them (unlike locking your money away in a term deposit). In this article, we explain the basics of high-interest savings accounts to help you get better value from your savings and manage your money more effectively.
Types of savings accounts and how they work
Not all savings accounts work the same way. While they all aim to help you grow your money, the way interest is earned (and the rules around them) can differ depending on the account.
Here’s a simple breakdown of the most common types of savings accounts you’ll come across.
Conditional savings accounts
Conditional savings accounts offer a higher interest rate, but only if you meet certain requirements each month.
These conditions are designed to encourage regular saving and may include things like:
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Depositing a set amount each month
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Growing your balance over time (excluding interest)
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Making no withdrawals during the month.
Some conditional savings accounts may also have a standard or base interest rate that applies even if you don’t meet the conditions, although others only pay interest when the conditions are met.
Interest rates on these accounts are usually variable, meaning they can change over time.
When you see an interest rate advertised for a conditional savings account, it’s usually the total rate which may include a base rate and a bonus rate combined (if both apply).
Introductory (promotional) rate savings accounts
Introductory savings accounts offer a higher interest rate for a limited time, often as a way to attract new customers.
Typically:
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The higher rate applies for a short introductory period, such as three or four months
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The account usually reverts to a lower base rate once the introductory period ends
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The introductory rate is often fixed for the promotional period
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Eligibility may be limited to new customers.
In some cases, the introductory rate may also come with conditions that need to be met to earn the full rate during the promotional period.
As with conditional accounts, the advertised interest rate is usually the total rate, made up of the introductory rate plus any base rate.
Non-conditional savings accounts
Non-conditional savings accounts are simpler and easier to manage, as they don’t require you to meet monthly conditions to earn interest.
However, this simplicity usually comes with a trade-off:
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Interest rates are generally lower than conditional savings accounts
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The interest rate is usually variable
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These accounts are often used for convenience or everyday saving, rather than maximising returns.
For people who value flexibility and predictability over chasing higher rates, non-conditional accounts can still play an important role.
Term deposits (for comparison)
While not technically savings accounts, term deposits are often considered alongside them.
A term deposit works differently to a savings account:
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You lock away a fixed amount of money for a set period of time (the “term”)
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Interest rates are fixed for the duration of the term
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Interest can be paid monthly, six-monthly or at maturity (subject to the term chosen).
Because the rate is fixed, term deposits offer certainty. However, accessing your money early may require a notice period and a reduced rate of interest would typically apply.
Different ways interest can be applied
Beyond account types, it’s also helpful to understand how interest is structured within an account. Different banks may use different names, but the concepts are similar.
Strata interest
Different interest rates apply to different portions of your balance. For example, one rate may apply to the first part of your balance, and a different rate to amounts above that.
Tiered interest
Your balance determines which interest rate you receive, and that rate applies to your entire balance. If your balance moves into a higher tier, the higher rate applies to all your savings.
Whole-balance interest
A single interest rate applies to your entire balance, regardless of how much money is in the account.
Understanding which structure applies can make a difference to how much interest you earn over time.
How interest works across our savings and investment options
Different accounts earn interest in different ways, depending on how they’re designed to be used.
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Life Saver and Bonus Saver are conditional savings accounts. They offer a variable bonus interest rate that applies to your entire balance when the account conditions are met. These accounts don’t have a base rate, so interest is earned when the conditions are satisfied.
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Retirement Plus is an everyday account designed for customers aged 55 and over. It earns variable, non-conditional interest, with different interest rates applying to different portions of your balance. This means your balance is split into tiers, with each tier earning its own rate.
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Term Deposits are investment accounts that pay a fixed interest rate on a set amount of money for a fixed period of time. Your rate is locked in for the chosen term, providing certainty over your return.
Other factors that affect how much interest you earn
How often interest is calculated
This refers to how frequently interest is worked out on your account balance. Many savings accounts calculate interest daily, based on your end-of-day balance.
How often interest is paid
This is how frequently the interest you’ve earned is actually added to your account, commonly monthly, but sometimes quarterly or at other intervals.
The timing of interest payments can influence how quickly your savings grow.
Why understanding interest matters
Knowing how interest works (how it’s calculated, when it’s paid, and what conditions apply) helps you:
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Estimate how much interest you could earn
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Compare different savings options more confidently
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Understand how small changes can affect your savings over time
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Reach your savings goals sooner.
This is where compound interest comes into play.
Understanding compound interest
Compound interest is interest earned on both your original savings and the interest you’ve already earned.
In simple terms, your money starts earning interest on top of interest which can make a noticeable difference over time.
For example, imagine you have a savings account where interest is paid monthly. Each month, the interest you earn is added to your balance. The following month, interest is calculated on this new higher amount.
To keep things simple, this example doesn’t factor in any account conditions or requirements.
Now imagine adding a regular deposit, even something as small as an automated $1 contribution each month. Over time, regular deposits combined with compound interest can significantly boost your savings compared to saving alone.
The key takeaway is that time and consistency matter. The earlier you start saving, and the more regularly you contribute, the more opportunity compound interest has to work in your favour.