Despite another interest rate rise of 0.25% on Melbourne Cup day being a “shoe-in”, which will take the RBA’s cash rate to 4.35%, term deposit rates are holding steady and starting to drift down. Longer term rates are dipping below 5%.
While this might seem inconsistent with the recent rise in bond yields, term deposit pricing isn’t an exact science. Most term deposit investors are retail, and banks typically pay a “premium” for retail funds. Influencing the banks’ appetite for retail funds (and how aggressive they will be with their term deposit pricing) is the cost of borrowing in wholesale markets, the amount of new loans they are writing and more recently, the expiry of the RBA’s term funding facility.
Introduced as a Covid measure by the RBA, the term funding facility provided the banks with billions of dollars of loans at virtually no cost. Because these loans are now being repaid, banks have been paying up in the term deposit market to attract replacement funds.
But this won’t go on forever, and in an environment where credit growth is still anaemic, if inflation can be cooled, big figure ‘5’ might be as high as term deposit rates get.
The best term deposit rates
With more than 140 ADIs (Authorised Deposit-taking Institutions) covered by the Government Guarantee on depositors’ funds, it can pay to shop around to secure the best rate. Don’t be put off by security or name concerns because with the effective Commonwealth Government guarantee on deposits of $250,000 on a per client per financial institution basis through the Financial Claims Scheme, Bank A is as good as Bank B up to $250,000.
Listed in the table below are rates on offer for the popular terms of 3 months, 6 months, 1 year, 3 years and 5 years. Rates are current as of 27 October and are based on a deposit of $50,000 with interest paid on maturity, or annually for terms of 3 or 5 years.
Rates are shown for the four major banks and 14 regional/significant/on-line banks. The major banks typically pay lower rates than the online banks and the regional banks. The highest rate is highlighted in green.
Judo Bank, AMP Bank and Rabobank have the best rates across the board. AMP Bank has the best 6-month rate at 5% and the best 12-month rate at 5.25%. Judo tops the 3-year rates with 5.05% pa (paid annually), while for 5 years, Rabo takes the honour with 5.1%. Macquarie has one of the highest 3-month rates at 4.7%.
Noteworthy is that the term deposit rate curve is inverted. For example, Macquarie’s 3-year and 5-year term deposit rates are below what they are paying for 12 months. The point of inversion (peak rate) is around 12 months.
You can also invest in term deposits through specialist brokers, such as Australian Money Market (https://moneymarket.com.au/ ). The advantages of using a broker are that you only need to open the one account (with the broker) and be identified once, and usually, they can find the highest rate. You do, however, need to have a particular bank account that the broker can debit, which in Australian Money Market’s case, is with Macquarie, BOQ or ANZ.
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.
