If you are have considered locking your cash into a higher-yielding deposit rate, now is the time

Deposit rates have improved as the cash rate rose but that’s likely to end soon.

We are almost certainly at the peak of the interest rate cycle and that means cash savings rates are going to start falling soon.

Act now if you want to lock in longer-term deals on term deposits.

In fact, the key rates which determine the rates offered on cash deposits are already falling. The benchmark 10-year government bond rate in Australia, which was over 4 per cent in July, has already dropped to around 3.8 per cent.

As money market rates slide, the banks and other finance providers will now be planning to introduce lower rates.

Savers and retirees who need dependable income streams have benefited from the 12 consecutive interest rate rises which brought us to an RBA cash rate of 4.1 per cent.

It’s almost the reverse of where we were in early 2021 when we hit the bottom of the rate cycle; that was the time to fix your mortgage.

We are now at the other end of the process and this is the time to “fix” cash deposit rates … and if it suits, do it for years.

When cash rates were better than property yields investors held off buying property.

For most active investors, bank-based term deposits continue to be the product of choice. That is because they are guaranteed to the tune of $250,000 per person per bank; they are quite literally risk free.

This government guarantee applies to all Approved Deposit-taking Institutions which can range well beyond the banks which are household names.

Financial advisers suggest the amount an investor may “fix” is at their own discretion, but also warn investors should check that deposit-taking groups are in fact ADIs. Finance companies offering term accounts paying 6 per cent or more might be lucrative to the investor, but they are not backed by a government guarantee.

Even assuming you are dealing with an approved ADI, such as a big four bank, it’s essential to read the fine print. Many of the advertised term deposit rates have strings attached, such as a high minimum level of cash upfront.

If we look at 3-year fixed term deposit rates, there is a 5.2 per cent rate from a leading bank but is requires a minimum of $25,000.

Among the big-four banks, at least $5000 is often required to access fixed 3-year rates near 4 per cent but the minimum can be lower if you go to a big-four subsidiary. Bank of Melbourne (a Westpac subsidiary) offers 4.05 per cent from $1000 upwards.

Moving beyond cash deposits, the likelihood that rates plateau and then drop from here will also be reflected in a range of related fixed-income products. Everything from bonds, private credit to bank hybrids will be repriced by the official cash rate moving lower.

LGT Crestone chief investment officer Scott Haslem told clients in a recent note: “This may potentially be the last chance for those who do not have enough fixed income or high-yielding assets in their portfolios to lock in elevated returns for a number of years.”

Although most advisers and market economists believe the economic fundamentals suggest we are the top of the interest rate cycle, one more lift from the RBA is not impossible. But then again, advisers say it is always difficult to precisely pick the top of the cycle.

For active investors there are also a range of effects on the sharemarket and the property sector that need to be kept in mind once rate rises are over. With inflation moderating, the outlook for both shares and property will improve.

On the sharemarket we have just had a period where the income from cash and from shares were more or less the same – that is, the dividend yield on the ASX and the official cash rate were both just above 4 per cent. Share investing for income will now become more popular as cash returns start to diminish.

Similarly, in property the income from rentals – expressed as rental yields – hovers around 3 per cent in the major cities after expenses. When cash rates were better than property yields, investors held off buying property. Investors could now start returning to high-yielding investment property.