Still value in a secure haven
Term deposits: not what they used to be
Be careful when locking into a long term deposit interest rate.
Despite term-deposit interest rates tumbling since the Reserve Bank started cutting the cash rate 15 months ago, there are still reasonable rates for savers prepared to shop around.
Two years ago the best one-year rate was 6.6 per cent. Now, researcher RateCity says, the best one-year rate among the banks for a deposit of $50,000 is 4.85 per cent from Investec, followed by ING Direct with 4.6 per cent. Among the non-banks, the best one-year rate of 4.45 per cent is shared by CUA, MyState and The Rock Building Society.
RateCity has more than 100 financial institutions on its database offering one-year term deposits, with an average interest rate of 4.08 per cent. However, there are big differences. The lowest one-year interest rate is 2.43 per cent, compared with the highest, 4.85 per cent. On a deposit of $50,000, the difference between the highest and lowest is $1210 of income for the year.
A notable feature from the RateCity data is that many of the best term-deposit rates are from the banks rather than non-banks. That is a change from the past several years when many of the better rates were offered by credit unions and building societies.
Michelle Hutchison, of RateCity, says one of the reasons for the change is that since the financial crisis the banks have faced higher costs to borrow from overseas to lend out. The banks have had to compete with higher term-deposit rates to attract savers and to reduce their reliance on expensive overseas funding. Another reason is that some credit unions have become banks, so their term deposits are now included in RateCity's bank category.
Even though term deposits are not paying what they did, there is still a place for them. Australian share prices may have lifted substantially over the past year but many people, especially those living off their savings, want somewhere secure to park their money. The federal government guarantees the first $250,000 that is on deposit with a bank, credit union or building society.
With most economists expecting the Reserve Bank of Australia to cut the cash rate by at least 0.25 percentage points by the end of 2013, it may be time to lock in rates now.
For those savers looking to lock away their cash for a longer period, the best-paying three-year term-deposit rate is 4.67 per cent from Investec.