Savings winners: term deposit tips to boost interest earnings

Should you lock away money in a term deposit to cash in on interest rates near 5 per cent? Read this before you do.

Stashing cash in a term deposit with an interest rate around 4 per cent may seem secure and attractive in today’s uncertain financial environment, but savers are being urged to ask some questions first.

The best term deposit rates right now are nearly 5 per cent, according to research group Canstar, but this means locking your money away for four or five years.

Finance specialists say term deposits have their place, but consumers should also consider other investment options, spread their savings, ask themselves what the money will be used for, and question whether their cash is in the best bank.

SAVINGS LOTTERY

Canstar group executive financial services Steve Mickenbecker says term deposit rates were climbing before home loan rates began rising in May, and some may not have much further to go.

“It’s a bit of a lottery as to whether you should lock into long-term rates or not,” he says.

“There’s nothing like the remorse when you have found you have locked into a rate and then the rates go up – it’s not a nice feeling.”

Mickenbecker says savers should have a good look at available deposit rates, “think about staggering your maturities”, and avoid signing up to automatic renewals because rates are constantly changing.

“I think term deposit rates could still move further up, certainly at the shorter end of one and two-year term deposits,” he says.

“But for five years, maybe that’s done as much as it will for a while.”

Savers should not feel wedded to standard terms such as one or two years, Mickenbecker says, because there are often good rates available for “odd numbers” such as 11 or 13 months.

BIG NOT ALWAYS BEST

“Remember that you can go to a provider that’s not one of the major banks.,” he says.

“The government guarantee is there for approved deposit-taking institutions for deposits up to $250,000. You don’t have to worry about the prospect of the bank going broke.”

The best term deposit rates at the moment are from Judo Bank, Firstmac, Macquarie Bank and People’s Choice. For example, Judo Bank has a 12-month term deposit rate of 4.1 per cent, while 12-month rates range between 2 and 3.35 per cent at the major banks.

The Commonwealth Bank recently unveiled term deposit rates of up to 3.95 per cent and 4 per cent for terms above 24 months, and RateCity.com.au research director Sally Tindall says this is a clear sign it wants more deposits.

“At 4 per cent, CBA’s highest term deposit is now over 13 times what it was before the RBA hikes began in May,” she says.

“CBA’s super-sized term deposit hikes will likely force other banks to significantly boost their rates if they want to remain competitive.

“If you’re going to lock up your money in a term deposit, make sure you get a competitive deal. The cash rate is still on the rise, so your term deposit rate should reflect this.”

Canstar’s Steve Mickenbecker suggests staggering maturities across term deposit time frames.

INVESTMENT ALTERNATIVES

William Buck Wealth Advisory director Adrian Frinsdorf says term deposits are not always a good strategy and there are better ways to make money in the current environment.

“In the current market it is highly unlikely, if not impossible, to find term deposits offering rates that will keep up with inflation,” he says.

“When savings don’t grow at the same rate as inflation, Australians effectively lose money through lost buying power.

“The best and strongest returns on wealth are made through acquiring long-term assets in a low market. For example, savers who currently hold significant cash with a long-term view on investing should consider purchasing shares and property as investment vehicles that will recover when the market rises.”

Frinsdorf says term deposits are a valuable tool when people do not want to take risks or may need the money in the near future.

“For example, cash savings needed in the next one to two years would be better placed in a savings product, such as term deposit or high interest savings account, than stocks or bonds,” he says.