Deposit rates getting better if you know where to look

The rolling rate hikes from the RBA are finally feeding into savings accounts but be careful, the good deals are few and far between.

The cash rate is still rising – after the Cup Day change it sits at 2.85 per cent – and higher mortgage payments aren’t far behind. But what about savings accounts? As term deposits approach 5 per cent, can we finally say they’re worth a second look?

We already know the banks are pocketing hundreds of millions of dollars a month by dragging their feet on rates in traditional savings accounts, even as official rates move north.

Back in August, Morgan Stanley estimated these additional earnings at close to $600m a month, or $7bn annualised. With the cash rate up a full 1 per cent since then, the nation’s lenders must surely be reaping even greater benefits at the expense of loyal customers.

Moreover, the banks know that customers – especially older and more conservative investors – greatly value the presence of the government guarantee on all bank-held savings. (This guarantee applies to all Approved Deposit Taking Institutions.)

Under the terms of the guarantee, bank-held savings are guaranteed by the government to the tune of $250,000 per person per bank. Advisers recommend that if you have more than $250,000 in cash savings then the safest tactic is to place your savings in more than one bank to ensure that every dollar comes under the guarantee.

When it comes to fully passing on rate rises, the major banks unsurprisingly employ the same strategy: rates move up across the board on mortgage products while any changes to savings account rates are highly selective.

For example, NAB’s first announcement this week only mentioned rate rises for mortgages, while its savings rates remain “under review”.

It took a similar line last month before upping its iSaver introductory rate by 0.7 per cent, bringing it to 3 per cent.

But even with this boost, the ongoing rate drops to a measly 1.1 per cent after the introductory period. Keep in mind, of course, inflation is now above 7 per cent – at a 1.1 per cent return, that’s a lot of money lost in real terms.

While the major lenders are still taking advantage of loyal customers with their at-call savings accounts, better deals on term deposits are beginning to appear. However, the best rates are beyond the big four banks. (All rates mentioned are subject to change).

Judo Bank offers the highest 12-month term deposit rate at 4.2 per cent, followed by Macquarie Bank and Bankwest at 4.1 per cent, according to comparison website Canstar.

Judo is also in front for two-year terms at 4.55 per cent, followed by AMP at 4.5 per cent.

For those brave enough to lock their money away for five years, rates jump to 4.95 per cent at Judo and 4.9 per cent at AMP.

Keep in mind also there may be considerable documentation if you are trying to access these rates through a self-managed super fund.

For financial Adviser Doug Turek, a partner at Minchin Moore Private Wealth, short-duration term deposits of, say, six months or so are more useful than locking cash away at 4 per cent for three years.

Most investors tend to think of term deposits as products offered over a one-year term or longer. But there are also a range of shorter fixed-term deposits on offer. As a rule, the rates on these terms will be better than at-call cash but not nearly as good as longer-term products.

For example, at CBA, the nation’s biggest bank offers a 12-month fixed rate of 3.3 per cent which is a competitive rate in a market where the official rate is 2.85 per cent. What’s more, it’s a big improvement on the six-month rate of 1.95 per cent. The three-month rate is 1.45 per cent.

“We overused (term deposits in the past) because we were very disappointed by the yields in the bond market a year ago, when it was being manipulated by central bank intervention,” Turek told the Weekend Australian.

“Now, the bond market is actually quite generous. Many mum and dads use term deposits as substitutes for the bond market and this was absolutely fine to do a year ago, but now people need to get smarter about the bond market because it actually is paying a premium of maybe 1 or 2 per cent.”

For investors keen to push ahead with term deposits, there are a few things to keep in mind before taking the plunge, including time horizon, risk tolerance and just how much cash you have sitting around, according to Steve Mickenbecker, group executive at financial comparison site Canstar.

“There is an emerging case for putting some of your money into term deposits because your return is a whole lot better (than it used to be). They’re starting to show a premium over savings,” Mickenbecker says. “Unfortunately, with an inflation rate of 7 per cent, these rates we’re talking about are actually negative real rates. So even if savers reinvest all of the interest and don’t spend any of that deposit, they’re still going backwards in real terms.

“Is it worth it? Well, you may lose 3 per cent in real terms on a four-year term deposit, but then you could lose 25 per cent on the stockmarket. Risk is what you’re avoiding with this asset class.”

On the time horizon, three years is a popular term length because it yields a decent return without locking money away for too long.

For most, a five-year term is too big an ask, Mickenbecker says. This is especially true as we wait for the peak in the hiking cycle.

For now, the majors are tipping a terminal (or peak of the cycle) official cash rate of between 3.1 per cent and 3.85 per cent, with CBA at the lower end and ANZ and Westpac at the upper end. (NAB sits in the middle at 3.6 per cent.)

Putting a portion of cash into a variety of term deposits – “staggering maturities” – is one way investors can get around the pain of locking money away for extended periods. “If you have quite substantial deposits, maybe splitting them isn’t a bad strategy,” Mickenbecker says.

“You might put some in at one year, some at the two years and another portion at three years. That way you’re taking advantage of the higher rate but if interest rates keep going up, you’re still not locking up all of your money for that longer period of time.”