From the RBA’s official cash rate to the amount you invest, there are several factors that influence term deposit interest rates.
When you’re looking to open a term deposit, one of the crucial steps in the process is to compare the interest rates on offer from a wide range of banks. Term deposit rates can vary widely from one bank to the next, and can also differ according to your investment term, the money you invest and how often interest is paid on your account.
Let’s take a closer look at the factors banks take into account when setting their rates.
What factors influence term deposit interest rates?
There are several things banks consider when calculating term deposit interest rates, including the following:
- The Reserve Bank of Australia’s (RBA) official cash rate. The cash rate influences a range of other interest rates in the economy, including home loans and term deposits. It refers to the interest rate banks charge each other on overnight loans, and is a benchmark rate they use when setting interest rates on term deposits.
- The amount you invest. As a general rule, the larger the amount you want to invest, the higher the interest rates available. For example, a bank may offer one set of interest rates for amounts less than $10,000, and a set of higher rates for deposits above $10,000. For large investment sums, such as $250,000 or more, you may be able to negotiate a special rate.
- The investment term. Another general rule of term deposits is that the longer the term you select, the higher the interest rate you will receive. This is due to the simple fact that your bank wants to encourage you to invest your money for longer, as this provides it with a guaranteed source of funding for an extended period.
- When interest is paid. The frequency with which interest is paid on your term deposit can also affect the interest rate that applies. You can usually choose to have interest paid monthly, quarterly, half-yearly, yearly or at maturity. The more often interest is paid, the greater your interest-earning potential. However, in some cases you may receive a lower rate if interest is paid more often.
- The type of term deposit. Some banks offer what are known as advance-notice term deposits, which allow you to withdraw your funds early if you give 31 days written notice and pay an early withdrawal penalty. This type of deposit tends to attract slightly higher interest rates.
- The deposit market. Your bank may want to gain a larger slice of the term deposit market share by enticing new customers with attractive interest rates that beat many of its competitors. By encouraging a large number of new customers to invest their funds in one of its term deposits, a bank can put some financial pressure on the competition.
- Your bank’s financial position. Banks can also encourage customers to invest in certain savings products by raising or lowering interest rates. For example, if a bank wants to decrease its reliance on funding from overseas sources, it can raise its interest rates on multiple-year term deposits to provide a secure, long-term source of funding from within Australia. Alternatively, it may look to increase the amount of term deposits on its books as a way of meeting a growing demand for fixed home loan lending, and could raise term deposit rates to entice new customers.
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Why do some term deposits attract higher interest rates than others?
How are term deposit rates set by each individual bank, building society or credit union? Interest rates are usually calculated based on a combination of the factors outlined above.
Some of those factors vary according to each individual customer’s investment needs, including the size of the deposit, the term chosen and the frequency of interest payments. It’s essential to compare term deposits that have all the same features when hunting around for the best interest rate.
Other catalysts can influence interest rates across the board. For example, if the RBA raises the official cash rate by 0.25%, you can expect many banks around the country to pass on a similar change to their term deposit rates.
Competition in the market can also have a noticeable effect. Take a look at the term deposit rates offered by Australia’s largest banks and you’ll usually see that they’re fairly similar. However, a bank can place pressure on its rivals by increasing some of its key deposit rates.
The global economic climate also plays its part. Financial turmoil in global markets can leave a bank vulnerable regarding the security of some of its overseas funding. It may seek to protect itself against any instability by raising term deposit rates, thereby attracting increased, secure local funding.
In addition, under the Net Stable Funding Ratio (NSFR) requirements, which come into effect next year, 15 of Australia’s largest banks will be required to rely on more stable sources of funding. This has already led to those banks offering higher interest rates on term deposits with longer maturities, and could continue to influence term deposit rates into the future.
How to choose a term deposit account
Keep a few simple tips in mind when looking for a term deposit:
- Compare multiple options. The only way to find the best deal is to compare term deposit interest rates across multiple financial institutions. Shop around and see which bank is offering the best rate for your investment amount and term.
- Make sure you are comparing the same details. As rates vary according to a wide range of factors, ensure that any interest rate you are quoted relates to your chosen term, investment amount, and length of time between interest payments.
- Remember that rates change all the time. The cash rate reflects the state of the economy, so it’s worth keeping in mind that the economy works in a cycle. A low cash rate is designed to encourage economic growth, while increasing the cash rate will lower growth and inflation. While locking money away in a term deposit can protect you against falling rates, it also means you are unable to withdraw your money and take advantage of any interest rate increases.
Compare term deposit rates from a wide range of banks and financial institutions to find the best place to invest your savings.