Australians with excess savings are being urged to consider their options carefully now that consensus is building that interest rates have peaked, offering the best returns for savers in years.

With the best savings rates available now topping 5.5 per cent and top term deposits reaching 5.25 per cent (one year), there’s no shortage of options to make the most out of your nest egg.

But working out which option suits your finances best isn’t always straightforward.

There are a wide variety of factors to consider, including the size of your savings and accessibility.

Experts said access to a mortgage offset account is also relevant, because in many cases that could be a better option than either a savings account or term deposit to maximise returns.

Either way, RateCity research director Sally Tindall said when it comes to savings it’s largely about where in the bank you want to park your money, unless you have a high risk appetite.

“It comes down to what your financial goals are and what your lifestyle is,” Tindall said.

Let’s examine the options for excess savings and the potential benefits and risks.

Mortgage offsets

Financial adviser and Sort Your Money founder David Rankin said that mortgage offsets generally deliver better benefits where available, saying the ultimate benefit is reducing the term of your home loan – making you mortgage-free sooner.

“Generally speaking, if you have an offset, over time that account is likely to be a more efficient place to park your money than either a savings account or term deposit,” Rankin said.

“That’s because, over time, mortgages tend to have higher interest rates than savings accounts or term deposits, and the higher your mortgage interest rate, the more your money benefits from sitting in the offset.”

Term deposits and savings accounts

Term deposits have had some positive press lately because a consensus is building that interest rates have peaked, which means locking away your savings looks like a more attractive option.

But with the best term deposit rates sitting about 5.25 per cent, they’re still behind the leading savings accounts, meaning you aren’t necessarily earning a premium for locking up your cash.

In other words, for many people a savings account is a safe bet that offers a superior rate of return in the short run (provided you shop around for the best deal).

The leading savings accounts do come with terms and conditions, including deposit requirements and stipulations that you must increase your account balance each and every month.

Source: RateCity (click to enlarge).

There are so-called “no fuss” accounts that offer lower interest rates without any fine print.

Term deposits can be a useful way to lock in a higher interest rate to avoid losing out when cuts occur, but leading forecasters are still split on when the Reserve Bank will start easing policy.

The bulk of opinion is centring around the second half of next year, which is still some time away.

Tindall said those with higher amounts of savings that would blow past limits on leading savings accounts could benefit from a term deposit, though this isn’t most people.

“Term deposits suit a certain type of person,” she said.

“You have to be happy locking away cash for a set period of time or risk paying admin fees or a reduced interest rate.”

Rankin said term deposits can be a good way to put your savings at arm’s length, but urged caution because of how interest is calculated.

“Term deposits do tend to pay higher interest than savings accounts, but term deposits usually only pay ‘simple interest’, whereas savings accounts usually pay ‘compound interest’,” he said.

“So with a savings account, you can usually expect to earn interest on your interest. Whereas term deposits usually only pay interest ‘at term’.”

Source: RateCity (click to enlarge).