The best rates on cash and term deposits

Co-founder of the Switzer Report
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The Reserve Bank made it pretty clear on Friday in its bi-annual Statement on Monetary Policy- “a period of stability in rates is likely”. So, no change to the RBA cash rate of 2.5% in the foreseeable future.

However, while the RBA won’t be changing its cash rate, it doesn’t mean that the markets won’t start to do some of the heavy lifting for them. Financial markets don’t like stability for very long – and markets only move in one of two directions, up or down. If we have come to the bottom of the down cycle, it means market-based rates (bank bill and bond rates) can ultimately only go one way – and that’s higher.

The markets will need reasons to take interest rates higher, such as the threat of higher local inflation, a plummeting Australian dollar or more likely, rising US bond yields. While these triggers may not be immediate, the direction on market interest rates is now pointing up.

What does this mean for retail investors, such as SMSF trustees like you and me?

As bank cash accounts are implicitly (and often explicitly) linked to the RBA cash rate, don’t expect any improvement in interest rates in the short term. Maybe in the fourth quarter of 2014 rates could start to move higher.

Term deposit rates are more likely to see some upward pressure, although the professional markets are only pointing (at this stage) to a 0.25% increase in the 90-day bank bill rate later this year. So, if you are rolling over term deposit monies in the coming weeks, take advantage of the very marginally positive yield curve and invest a little long, but not too long. Around six to nine months might be the pick.

There is no harm in seeing whether we can make our cash work harder. Here is our regular review of what the banks are paying, for cash or on a fixed term deposit, to help you do just that. But it’s not always just about the interest rate. Make sure you understand the accounts terms and conditions before you roll anything over.

Bank accounts

I am somewhat aghast at the number of questions I get along the lines “is this bank safe?”. Well, maybe not if you don’t believe in government guarantees – for me it is largely an irrelevant question. Known as the ‘Financial Claims Scheme’ and administered by APRA, the Government guarantees deposits (including term deposits) of up to $250,000 on a ‘per account holder per financial institution’ basis. That is, your fund can have $250,000 in total with Bank A, another $250,000 with Bank B, another $250,000 with Bank C etc. – and all deposits will be covered by the guarantee. (see http://www.apra.gov.au/CrossIndustry/FCS/Pages/default.aspx ) A financial institution includes banks, credit unions, building societies etc.

So, the question is: how many accounts do you want, and is it worth the effort to change or open a new account?

Let’s start with the rates and features for those banks offering tailored SMSF cash accounts.

If interest rate is the key determinant, then UBank and RaboDirect are the clear leaders. UBank, with its bonus rate of 3.96% that is paid in any month when there is no withdrawal, edges out RaboDirect. Of the majors, Westpac with its integrated “two account” structure of a ‘working account’ and ‘savings account’ (the latter paying 2.70% on the whole balance) is better than the CBA.

However, if your SMSF has more than two trustees or two directors – you can’t open an account with UBank!

If transactional ability is important, then it is hard to go past the major banks. The online banks (and some regionals) require a ‘linked bank account’ for making payments/transfers out, and don’t offer BPay. This can be somewhat self-defeating for an SMSF, as you will then need to maintain a second account with a bank that provides transactional capabilities, potentially incurring a monthly fee of up to $10 per month.

UBank has attempted to address this and a linked account is not mandatory. While it offers a ‘pay anyone’ facility, this is capped at $20,000 per day and payments in excess must be done via a linked account.

Term deposits

If you can get through the hassle of the account “opening process” (ING Direct is probably the standout with the easiest process), then interest rate is really the only consideration. One proviso – ask the bank about the notice they provide when your TD is set to mature and how easy it is to advise them of your new instructions. With some TDs set to automatically rollover into a new deposit of the same term at the standard rate (rather than the “headline” or “blackboard special” rate), the new rollover rate can come as a nasty shock to investors who forget to advise their bank.

ING Direct, RaboDirect and UBank also reward investor loyalty by paying an additional 0.10% pa when an investor rolls over the full amount of a term deposit to a new deposit term.

These are the latest rates:

Rates as at 7 February 2014, for deposits of $50,000 and upwards. Interest paid on maturity, or annually for 5-year term.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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