Banking & Insurance - July 21st
During this era of low interest rates, savings have been – to be blunt – a near waste of time. As the Official Cash Rate dropped, so did mortgage rates, deposit rates, and any incentive to…– Read more
Savings Accounts - April 21st
Securing your financial future requires more than just keeping your money somewhere safe. If your regular cash flow leaves you with enough resources to set some aside each month, choose investment as the smarter, more proactive,…– Read more
A term deposit is an investment of cash placed with a financial institution for a fixed period of time, known as the term, with a fixed interest rate for your return at the end of the term. Term deposits are commonly referred to as a TD but can also be known as a certificate of deposit or CD, a time deposit or “bonds”.
Fixed terms can typically range from one month to five years – but some can be up to ten years – and the money can usually only be withdrawn at the end of the term. If you need to withdraw your funds before the end of the set term, you may receive an interest rate penalty.
Term deposits are popular for use by investors who prefer receiving a set return, instead of worrying about the possible daily fluctuations of the interest rates on offer for at-call accounts. Some investors may use term deposits as just one part of their particular mix of investments.
Applying for a term deposit is essentially the same as applying for a normal savings bank account, and most applications can be made online.
After the Global Financial Crisis intensified in September 2008, the New Zealand Government responded with a number of measures, designed to alleviate the effects, according to an economic overview from the Treasury. Business and consumer confidence plummeted, due to the uncertainty around the economic environment. Treasury’s measures included the Reserve Bank lowering the Official Cash Rate from 8.25% over the year to July 2008 to a low of 2.50% at the end of April 2009.
The Reserve Bank also introduced retail and wholesale bank guarantees to help restore consumer confidence in banking, and ensure the banking sector had access to adequate liquidity. Liquidity is the liquid assets – or cash on hand – a bank has so that it can meet payments in case of economic uncertainty. Deposits represent a liability for banks, and deposits are lent out to become income-producing assets.
By January 2019, the Reserve bank had adjusted the official cash rate – fluctuating up and down – a further 14 times. As at February 2019, the OCR is at a record low 1.75%.
In 2015, the Reserve Bank of New Zealand lowered the Official Cash Rate four times, bringing it to 2.50 in December. In June 2015, the OCR was at 3.25, but 12 months on, it is now at 2.25. A low cash rate doesn’t necessarily mean a lower rate for term deposits, as it’s not the only factor banks consider. However, banks rates traditionally do closely follow the OCR.
At time of writing, a $100,000 investment on a 12-month term deposit would pay $3,450 at maturity with the maximum interest rate available on Canstar’s database (3.45%), but only $3,000 on the minimum rate (3.00%), a difference of $450, according to Canstar’s latest comparison of term deposit rates. A $100,000 deposit invested for four years could potentially earn, at time of writing, $3,950 per annum based on the highest 4 year term deposit interest rate on Canstar’s database. In the current low interest rate environment, it is wise to shop around for a good value term deposit.
All 12 providers we researched in 2016 cut their term deposit rates over the past 12 months. However, three cut their rates by more than 100 basis points and the remaining 9 cut rates by 50 basis points or more. Research is based on a deposit amount of $25,000.
Canstar only included 9 banks in its star-ratings for term deposits. This is because institutions must have a credit rating of at least Standard & Poor BBB+ or equivalent with other agencies. Borrowing agencies are rated based on their ability to meet their financial commitments. A rating of BBB means the institution has adequate capacity to meet its financial obligations but this ability can be weakened by changing circumstances, such as adverse economic conditions.
You can compare term deposit rates of 13 financial institutions listed on Canstar’s comparison tables.
Finding the highest interest rate before locking in your term deposit is especially important when rates are this low. You can compare the interest rates for different term deposits on our website. You can also compare the interest rates for savings accounts.
With the official cash rate currently staying put at 1.75%, self-funded retirees might be wondering how much income they could really receive from a term deposit. The amount earnt will differ from short-term deposits – where the term is less than 12 months – to long-term deposits – where the term is more than 12 months.
One of the main issues in choosing a term deposit is whether to invest for the short term in the hopes that interest rates will rise, or for the long term to lock in today’s rate in case it falls further. Unfortunately, none of us can see the future, and we don’t recommend using a crystal ball to decide which way to go.
One way to hedge your bets is to “ladder” (stagger) your investments. Laddering is a strategy where you place some of your money in a long-term deposit, and the rest goes into several short-term deposits that mature every month or quarter and automatically renew at the current rate. That way, you don’t “miss out” on higher rates that come up now and then, and eventually all of your money is invested in a long-term deposit.
It’s a bit like singing a harmonic canon in rounds: someone is always starting the melody while another is finishing.
Whichever strategy you choose, make sure you get a good term deposit rate. You can read Canstar’s latest Term Deposit Star Ratings Report and compare term deposit rates.
Please note that these are a general explanation of the meaning of terms used in relation to term deposits. Your bank or financial institution may use different terms, and you should read the product disclosure statement of your policy carefully to understand everything that may apply during your investment term. You cannot rely on these terms in relation to any term deposit policy you may purchase.
Advance notice term deposit: A term deposit where the institution allows you to withdraw the money earlier than the end of the term, if you pay a penalty fee and give advance notice of 31 days. Advance notice term deposits often have a slightly higher interest rate than standard term deposits.
Basis points: A unit of measurement used in financial situations to describe the percentage change in interest rates or the value of a financial product. One basis point is one tenth of a percent or 0.01%.
Cooling-off period: Defines the number of days available for the investor to change the investment term or amount of money invested in the term deposit. This is done after the maturity date (when the term deposit has reached its agreed length) and usually is up to seven days.
Coupon payment: A portion of a bond, entitling the holder to receive a payment of interest. For example, a 10% coupon paid semi-annually would yield two 5% interest payments.
Debenture: A medium to long-term investment issued by a company when you lend money to that company. In return for your investment, you receive a regular and fixed amount of interest for the term of the investment. The invested funds (principal) are repaid at the end of the term (maturity).
Interest paid: The amount of simple interest paid on the principal amount (the initial amount of money placed in the term deposit). For example, a term deposit paying 6% interest per annum would pay 6% of the sum invested at the end of a 12-month term, or 3% at the end of a 6-month term.
Laddering: A method of investing in term deposits. The investor puts some of their money in a long-term deposit and the rest in several short-term deposits that renew regularly.
Maximum term: The maximum amount of time that you can receive a certain interest rate on a term deposit.
Maturity: The time at which the term deposit will expire and stop accumulating interest. Also known as the ‘end of term’.
Minimum term: The minimum amount of time that you can receive a certain interest rate on a term deposit.
TD: Term deposit.
Term: The length of time or duration a term deposit will run for.
Term deposits: An account with a financial institution where money is deposited for a set period of time. The interest rate is usually fixed for the term of the deposit and is generally higher than a transaction account, but not always higher than some other at-call high interest savings accounts. Also known as a fixed deposit.
Yield: The rate of return earned on an investment.
For more information on how CANSTAR rates term deposits, read our latest star-ratings report.