Term deposit rates have eased marginally since I posed the question “have term deposits peaked?” in late October and recommended locking in longer term (up to 5 year) maturity terms (see https://switzerreport.com.au/have-term-deposit-rates-peaked/) . On that day, the benchmark 5 year Australian Government Treasury Bond was yielding close to 4.6% pa – last Thursday, it was down to 3.8% pa. On the other hand, 5 year term deposits were paying up to 5.2% pa, now they are down to around 5% pa. A fall of 20bp compared to the bond market’s drop of 80bp.
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” premis……….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.
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 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 29 January 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, with the exception of a 5 year rate, where Rabo takes the honour paying an exceptional 5.10% pa. The major banks are most competitive at the 12 month mark, with either a published or special rate of around 4.90% for that period.
Noteworthy is that the term deposit rate curve is marginally 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 twelve 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.
