Term deposit rates are on their way down. In fact, they have already fallen for longer terms (6 months or more) as expectations of the timing of the first rate cut in Australia build and Central Banks across the globe start to cut rates.

Government bond yields (which term deposits are correlated to) have fallen steadily, with the 5-year Government Treasury Bond down to around 3.9%. At its peak, the 5 year government bond yielded over 4.6%. The two year Government bond is also around 3.9%.

Australian 2-year Government Bond Yield

Source: Trading Economics

Australian 5-year Government Bond Yield

Source: Trading Economics

But there is still considerable uncertainty as to when the RBA fires the gun to start the rate cutting cycle in Australia. Some economists suggest there will be a “Melbourne Cup Day” rate cut, others say it won’t happen till May 2025. Critical to the timing will be the September Quarter CPI data, which is due to be released on Wednesday 30 October.

In any event, it is only a question of “when” rather than “if”, and with banks anxious to maximise net interest margins, term deposit rates will continue to drift lower. In this scenario, longer terms for term deposits become more attractive.

I am a great believer in term deposits in investors’ portfolios (if the rate and term is right) because term deposits are one of the few investments where retail investors get better rates than wholesale investors. This is for two reasons.

Firstly, arising out of the GFC, the Federal Government “guarantees” bank deposits up to $250,000 on a per   account basis. Known as the Financial Claims Scheme, investing in Bank A is as good as investing in Bank B from a credit risk perspective. You can invest in a tier 3 bank, who tend to pay higher rates than the major banks, knowing that the deposit is guaranteed by the Commonwealth Government. Effectively, you are getting tier 1 risk – the same risk as investing in a government treasury bond, and usually receiving a higher interest rate. Secondly, because Banks have to meet liquidity ratios set by APRA, they are “encouraged” to seek funding from retail investors (who are considered to be more stable with their deposits than wholesale investors), and as a result, Banks tend to pay higher rates on retail term deposits.

Of course, there are downsides with term deposits. There is no ready way out, unlike a government or corporate bond which can usually be sold on the market. If you invest in a 5 year term deposit and suddenly need the money, getting your money out early can be a little tricky (and costly – 31 days’ notice, interest adjustment factor, fee). Secondly, maturities can be easy to forget and it is not that easy to open an account with a new bank. Many Banks work on the “inertia” premise…an attractive rate to get you to invest, followed by a less attractive rate when you come to roll the deposit over. Reinvestment risk is under appreciated by many investors.

But this all said, I think there is a major place for term deposits in investors’ portfolios.

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 from a credit risk perspective, they are all the same (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 11 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 has the best rates across the board. Westpac’s 4.65% for 11 months (4.75% if opened online) is probably the pick of the major bank rates on offer. 5 year and 3 year term deposit rates have come down considerably as bond yields have fallen and expectations grow that the RBA will cut rates. Only Judo and Rabobank are now above 4% for 5 years. If 5 years is too long, Judo’s 4.65% for 3 years looks to be good value.

Term Deposit Rates at 11 October 2024

Rates as at 11 October, 2024 for deposits of $50,000 and upwards. Interest paid on maturity, or annually for 3 and 5 year terms. Advance notice (31 day) products selected when offered.

* ING is for personal customers only. ** Teachers Mutual is “member” rate.

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.