Find out when you can expect increased returns on the money you invest in a term deposit.
Term deposits offer a safe and reliable way to save money. Featuring fixed interest rates that promise the security of guaranteed returns, term deposits provide peace of mind and a simple way to boost your bank balance.
Unfortunately for Australian savers, term deposit rates are currently at record lows, which has many people wondering when they can expect the banks to increase their rates and improve saving conditions.
So when will term deposit rates go up? To find the answer to this question, it’s important to first gain an understanding of the many factors that influence term deposit interest rates.
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Why are term deposit rates so low at the moment?
Analysis by finder.com.au released in April 2017 revealed that term deposits are delivering an average rate of return of just 2.45% to Australian savers. That’s the lowest average return on record since 2002, when the Reserve Bank of Australia (RBA) first started collecting this type of data.
So, why are term deposit rates currently at basement levels? The answer can be found by taking a look at the RBA’s official cash rate. In August 2016, the rate fell to an all-time low of 1.50% and has stayed at that point until the time of writing this in 2017.
The cash rate is Australia’s benchmark interest rate, so any changes the RBA makes to this figure are commonly passed on to the products offered by Australian banks. So while the current low rates are great news for home loan borrowers, they mean that savers are forced to accept minimal returns on their term deposit investments.
However, it’s worth pointing out that a cut to the cash rate doesn’t necessarily mean lower term deposit rates. As an example, when the RBA cut the cash rate from 1.75% to 1.50% in August 2016, the Commonwealth Bank of Australia (CommBank), the National Australia Bank (NAB), Australia and New Zealand Banking Group (ANZ) and Westpac Banking Corporation responded by raising rates on some key term deposits. There were several possible reasons behind this move, including:
- Putting pressure on smaller financial institutions in the term deposit market
- Generating more funding to cover an increased demand for fixed-rate home loans
- Providing protection against overseas financial turmoil by reducing reliance on overseas funding sources
What factors affect term deposit rates?
There are several factors that have an influence on how banks set their term deposit rates, including:
- The official cash rate. The RBA considers a number of factors before it adjusts the official cash rate. When the RBA cuts interest rates (recent years have seen the official cash rate fall from 4.75% in late 2011 to its current 2017 level of 1.5%), it does so with the aim of stimulating the economy, since a lower rate reduces the cost of borrowing. A rate increase is designed to encourage spending, and all interest rate decisions are made in line with the RBA’s goal of keeping inflation in the 2-3% range.
- What the competition is doing. Australia’s banking industry is highly competitive and the major banks are always looking for ways to steal a march on their rivals. A quick comparison of term deposit rates across the major banks reveals just how competitive the deposit market is, and a bank will consider how its products compare to those offered by other financial institutions when setting rates.
- The bank’s financial position. If your bank is looking to improve its financial position, it may want to increase the amount of funding it receives from term deposits. In an effort to increase its share of the Australian term deposit market, it might increase the rate it offers on specific term deposits to entice new customers away from its competitors.
- The global economic climate. Banks also make interest rate decisions based on future economic forecasts. For example, a bank may choose to protect itself from overseas financial turmoil by reducing its reliance on funding from overseas sources and at the same time increasing its funding from Australian deposits. In order to do this, it may raise its term deposit rates relative to the competition.
These factors combine to affect how banks set different interest rates based on:
- The amount you invest. If a bank wants to encourage increased investment in term deposits, it may offer higher interest rates to customers who invest larger sums of money.
- The length of the term. By offering higher rates for long-term investments, such as deposits with terms of 12 months or longer, your bank can access increased funding for an extended period.
- When interest is paid. Interest rates tend to be lower on term deposits that pay interest more frequently, such as monthly interest payments instead of quarterly payments.
So how do I know when term deposit rates will increase?
There’s no surefire way of predicting what will happen to term deposit interest rates in the weeks and months ahead. However, there are a couple of simple things you can do to get a better idea of when rates may increase:
- Check out interest rate predictions from economists and financial experts – the finder.com.au cash rate survey is the perfect place to start. Monitoring announcements from the RBA will also help you form a clearer idea of if and when rates will go up.
- It’s also a good idea to regularly compare term deposits across Australian banks, building societies and credit unions at finder.com.au. This will help you determine which way term deposit rates are trending and where you can find the best value for your money.
How to find the best term deposit interest rates
Regardless of the RBA’s official cash rate and average term deposit rates, there are still several things you can do to increase the interest-earning capacity of a term deposit:
- Shop around. Although average term deposit rates may be at record lows, there’s still a substantial difference between the lowest and highest rates on offer at any given time. With this in mind, it’s essential to compare a range of term deposit options and shop around for the highest interest rate you can find.
- Look beyond the major banks. Australians have a tendency to remain loyal to their regular bank, which is more often than not a Big Four bank, even if it doesn’t offer the best interest rate. However, some of the best term deposit deals can be found at Australia’s smaller banks, credit unions and building societies, so don’t be afraid to look beyond the Big Four for a good deal.
- Consider investing for longer. You will typically be able to find slightly higher rates on deposits with longer terms than on those with shorter terms. If it’s convenient for you to lock away money in a term deposit for 12 months or more, you will be able to enjoy higher interest-earning power.
- Invest a larger amount. The larger the amount of money you have to invest, the higher the interest rate you will receive. Many banks offer tiered interest rates for term deposits – for example, they may offer a base interest rate for deposits of up to $10,000, a slightly higher rate for deposit amounts of $10,000 to $25,000, and a higher rate again on amounts of $25,000 or more.
- Negotiate. If you’ve got $100,000 or more to invest, many financial institutions may be willing to let you negotiate a better rate. The more money you have to invest, the greater your bargaining power, so don’t be afraid to ask for a better deal.
- Divide and conquer. Although current term deposit rates are at record lows, things won’t stay that way forever and rates will rise again at some stage. So rather than locking all your money away in a term deposit for an extended period, it may be worth investing a portion of your funds elsewhere (such as in an online savings account) so that you can easily access it if term deposit rates go up.
Other factors to consider when choosing a term deposit
Apart from the interest rate, there are a few other important issues to consider when comparing term deposit accounts. These include:
- Fees. Does the account have any setup or ongoing fees? What penalties apply if you need to withdraw your funds before the deposit matures?
- Minimum deposit required. Check the minimum deposit requirement that applies to an account. This is commonly $1,000 but may be higher in some cases.
- Term length. How long do you want to invest your money? Remember that penalties apply to early withdrawals, so make sure you can afford to lock your money away for the duration of the term.
- How often interest is paid. The interest payment frequency affects how quickly your balance will grow – the more frequently interest is paid, the greater your earning power.
- What happens when the deposit matures. Finally, make sure what happens to your money when the deposit matures. For example, will the entire balance be paid into a separate bank account or will your funds automatically rollover into a new term deposit?
You can also find out more about comparing term deposits in this handy guide.
Got it! What do I do now?
The next step is to check out our finder page on comparing term deposits. Use the table above to compare the interest rates available for your chosen term and investment amount.
Once you’ve found a few accounts you like, click the relevant “Go to site” links to find out more about the features and conditions of each product. Compare the benefits and drawbacks of each term deposit before deciding which one is the right fit for your investment needs.