Illustration: Rocco Fazzari.
Illustration: Rocco Fazzari.
Interest rate rises don't automatically translate to better deals on deposits, writes John Collett.
As everyone knows, the big banks have been the big winners out of the global financial crisis. Not only are they writing nine out of 10 new mortgages but they dominate the term-deposit market as well.
About 80 per cent of the $600 billion in term deposits is with the major banks. Yet, their term deposits pay between 0.5 percentage points and 0.7 percentage points less than the best rates in the market, says the managing director of term-deposit broker The Term Deposit Shop, Grant Goodier.
Those wanting to secure good interest rates may have to act soon as term-deposit interest rates have come down slightly over the past couple of months.
A spokesman for InfoChoice, Dirk Hofman, says the top rates for one-year to five-year term deposits have all dropped this year.
Growth in lending for houses has dropped to its lowest level in 10 years because of last November's interest-rate increase and the big banks' top-up to their mortgage rates.
In recent years, the banks have secured other sources of funding and are not as reliant on retail investors.
Even though financial markets are expecting the official cash rate to rise by 0.25 percentage points once or twice this year, that does not mean the interest rates offered on term deposits will rise, Goodier says.
''In fact, the banks may use any increase in the cash rate to reduce the margin they pay for term borrowings from the retail market,'' he says.
Canstar Cannex's tables of term deposits show Teachers Credit Union, with an ''effective'' interest rate of 6.8 per cent a year, is the best-paying three-year term deposit for $25,000. Interest is paid monthly. The next best is Victoria Teachers Credit Union, which has interest paid annually, and RaboDirect, with interest paid monthly, each with effective rates of 6.75 per cent.
The effective rate is a better indicator than the nominal rate as the effective rate includes the frequency with which interest is paid. Two term deposits may have the same ''nominal'' rate but the term deposit with the highest frequency of interest payments has the highest actual, or effective, rate.
Credit unions
Some of the highest-paying term-deposit rates are offered by credit unions and building societies.
Yet the share of the term-deposit market held by credit unions and building societies is only about 5 per cent.
Credit unions and building societies are just as safe as banks. They are regulated to the same standards as the banks and are also covered by the government's retail deposit guarantee.
The guarantee covers each investor for cash deposits of up to $1 million per institution, provided the institution is an ''authorised deposit-taking institution'' regulated by the Australian Prudential Regulation Authority.
To help the non-banks compete with the banks, the government has said it will retain the guarantee after it is due to expire on October 12 this year. It is expected, though, that the government will lower the limit from $1 million.
Those with very large amounts should spread it between institutions in case the limit is lowered, Goodier says. They could also spread the money between term deposits with differing maturity dates.
''Put the money into smaller parcels over different terms - some short-term, some medium-term and some long-term - that way, you have a hedge against changes in interest rates paid on term deposits and access to at least some of the money,'' he says.
DIY term deposits
Investors do not just have to accept the term offered by financial institutions on their term deposits.
Banks will generally be flexible and the investor can specify their desired maturity date for term deposits, says a financial analyst at Canstar Cannex, Adam Beu.
Perhaps an investor wants to settle on a house purchase and the settlement date is in three months and 10 days' time. Investors can ask for a term deposit that matures then.
ING Direct, for example, has a calendar on its website where investors can put in the date they need to have their money returned - up to one year - and the interest rate is provided.
''A lot of the term-deposit market is negotiated,'' Beu says. ''Particularly for amounts of more than $100,000.
''Local bank branches also have manager specials from time to time, because the local bank branch has targets to hit.''
Beware rollover rates — don't let inertia cost you dearly
Investors may think there is no more simple investment than a term deposit. But in the race to secure the cash of small investors, financial institutions have been engaging in some slick and tricky practices.
Last year, the Australian Securities and Investments Commission released the results of a survey of term deposits that showed many financial institutions engaged in "dual pricing", where new savers are paid a higher rate to put their money in a term deposit than existing investors, who roll over into a new term deposit of the same term.
Dual pricing was found mostly in deposit terms of less than one year. The regulator warned investors not to allow themselves to be passively rolled over into lower-paying term deposits but to shop around.