Term Deposits. How low can they go?
Two years ago I was out shopping. I’m not much of a shopper; endless looking for stuff I don’t really need is not my idea of fun. But I WAS shopping for something I found enjoyable. A new Term Deposit. Exciting stuff indeed. Rates had been dropping like a nugget of gold in a Central Otago river, but who would have thought at the time they would drop as low as they are today? I could have done more, I should have done more. Or more specifically I should have locked in what I thought was a terrible term deposit rate of 5% for a whole lot longer than two years! Grrrrr.
At the time I had a reasonable chunk of change that I was not sure where to invest. I didn’t know if we would be needing it soon or how much risk I wanted to take. So I made the only decision I could think of at the time. I bought a house in Auckland. No no no, scrap that... I put it into a Term Deposit to give me time to THINK. The rates on offer were TERRIBLE. Terrible I tell you. Banks were offering 5% or lower during my shopping spree. What an insult! How little I knew... If only I had invested more. Ahhhh, hindsight again!
What exactly is a term deposit I hear you ask? Put simply, I deposit a sum of money, say $10,000 with my bank (or you could use some other institution such as Credit Union or Building Society) for a fixed term, typically between one month or up to 5 years (it varies). Either at fixed intervals (say every six months) or at the end of the term investment they will give me my $10,000 back plus the interest it has earned less tax. During the term of the investment their expectation is that I don’t try to get it back (if I try to get it out early they will penalise me financially). When rates are higher it is a relatively ‘safe’ place to put your money.
I have used Term Deposits off and on over the years but usually for short periods of time. Two years was the longest I had tied money up but it felt good to lock it away where I would also earn a bit of interest along the way. For those who are tempted by money building up in the bank a Term Deposit is a good way to keep your hands off it. I also like Mary Holm’s strategy of staggering Term Deposits so that each one matures at a different time, thereby giving you a steady return. But with things the way they are I am beginning to think this is the option for me at the minute.
Prior to setting this one up I shopped around. The best place I find to start is www.interest.co.nz where they show an up to date list of Term Deposit rates. I picked out the top four. At the time I was a customer of one of New Zealand’s largest banks so firstly I went onto their website and checked out their rates, then I went to the other institutions web sites. Then I rang each of those banks and haggled.
In my experience they will always give you a better rate if you ask for it nicely. Except if you are one of New Zealand’s largest banks. My own bank would only offer 4.8% and their competitor was offering 5%. Although during my phone call I was ‘escalated’ up to a manager they would not budge, even when I said I would just change banks. They called my bluff and refused to come up to 5%. Fair call I guess, as although we used to have a mortgage with them that was now gone so they were not really making any money out of us anymore. Having been a good customer and having all of your banking with a bank is clearly not enough for them to stump up a paltry 0.2%...
So, I immediately proceeded with setting up a Term Deposit for two years at 5% with another bank. Very friendly they were too. Because it was a larger sum I had to physically go into my bank to transfer the money away. At my bank three of the tellers all had the same name which was very confusing (and irrelevant to this story) but one of them gallantly tried to sit me down in front of a personal banker and “see what they could do”. Too little, too late and I was out of there. We might have been quibbling over 0.2% but it was the principle goddammit!
I have a sister who is super positive. If you put her in a dark padded cell all alone for a week she WILL find the positive. What a great space for some uninterrupted creative thinking time would be her conclusion! So, to find the positive in what was a terrible interest rate at the time I have been receiving about $1,000 after tax every six months. Not a lot, but it was nice when it arrived (straight into savings it went, I have never spent a penny). Once you average it out it is just an extra $40 a week but that is an hour I didn’t have to work right?
So, the expiry period of this two year term deposit is about to roll around and I’m struggling with where to invest it. Again.
Rates are EVEN WORSE than 24 months ago. I have begun the shopping around process and I’m looking at 3.3%. Is it even worth it? Surely this must be a fine line for banks to balance on? They need savers so they can take our money and lend it out to spenders. But they need to make it worth our while to make the effort to entrust them with our cash yes? When I rang my bank for a chat about Term Deposits she summed it up succinctly with “all options for saving are low at the moment”.
I noticed on the interest.co.nz site that “Finance Companies” are offering better rates at 3.3 - 6%. Finance companies can’t be all bad yeah? On the same day I read about these rates I also read in the newspaper that the last of the finance company cases was being brought by the Financial Markets Authority before the court. I know a number of people caught out by these rogues so I’m not about to start investing there. What about Bank of Baroda who are offering 3.75% for a two year term? Investing may actually add to my geographical knowledge of the world? I might read up on a few of them though to increase my general knowledge but I don’t think it will be today.
When traditional straight forward avenues for savers start to dry up the flow on effect will be that people such as myself start to look into other ways to get a better return. For those people (particularly retirees) who need to earn an income off the money they have invested it must be quite a stressful time. This week the Reserve Bank again cut the official cash rate by 0.25 bps. Now I don’t pretend to understand all the ins and outs of this but as soon as I heard it I knew it was bad news for savers. The pattern has been that the rate drops, people are offered cheaper mortgages and savers are offered fewer returns. HOWEVER, to my surprise and excitement this appears not to be the case this time. It is Friday as I write this and it would appear that one big bank is actually increasing their term deposit rates. I didn’t see that coming. When I was speaking with my bank earlier today I had said that “it looks like my only option is to take my money elsewhere to invest” that they may have actually been listening? I doubt it, BUT this is good news and I will be watching closely.
So, what have I concluded?
Prior to today’s announcement I had decided the following:
I already have a diverse list of investments that are performing better than any new term deposit would. I’m here for the long run and will be sticking it out through many market cycles (both up and down). So, instead of starting up something new at this stage I am going to add this maturing term deposit into these existing investments. Gold had climbed up in price but has dropped back to the price it was when I purchased in May so I’m pretty tempted to buy more (so shiny!). I will take the opportunity to push a little into our Kiwisaver accounts which we pay into voluntarily (not too much as I don’t want it all locked away). I’m happy with my Smartshares investment as well so I’m going to pump some into there too. AND we are going to spend a little on an upcoming trip. After all, what is the use of having it if you can’t enjoy a little from time to time?
In light of today’s unexpected announcement this strategy may be revised. My term deposit expires very early in September and I’m very glad that I have done all of my homework NOW so that I can act quickly when the time comes. I will keep you posted. To be continued…