Co-author: Regina Collins
The days of having double digit cash rates are now long gone. While this is fantastic for those paying off a home loan, it?s bad news for those trying to find a healthy return on their savings. The good news is our currently low inflation rate leaves plenty of room for your wealth to grow.
Working out the return you need to break even
The table below shows the gross before-tax return that is needed from a term deposit in order to break even, across the various income tax thresholds.
Inflation remains at 1.5% as of April 2017 (RBA). In some ways, this is good for savers because low inflation reduces the risk of the net value of your savings going backwards in a cash investment.
|Marginal Tax Rate||Inflation||Gross before-tax return needed to break even|
|Sources: www.canstar.com.au, ATO, Reserve Bank of Australia, April 2017|
What interest rates are on offer?
The interest rates on offer at the time of writing with savings accounts and term deposits on the Canstar website are as follows:
|Total Rate (Bonus + Base Rate)||Base Rate|
|Interest Rate (1 Year Term)|
Rates current as at April 2017.
Finding a high interest rate
The combination of a low cash rate and low inflation makes it important to choose a term deposit or savings account that offers outstanding value for money across rates, fees, and features.
CANSTAR regularly crunches the numbers on close to 100 term deposits across Australia to determine which products offer outstanding value for money. Compare your options on our website to see which term deposits are the cream of the crop:
CANSTAR also regularly researches and rates more than 400 savings accounts across Australia to determine which accounts offer outstanding value for money. Don’t just go with your usual bank when it comes to growing your savings – compare your options and look for a high interest rate:
What do I look for in a term deposit?
A term deposit is a cash investment held at a financial institution – bank, building society or credit union – for an agreed rate of interest over a fixed amount of time, known as a term.
Picking a term deposit means more than just looking for a way to earn high interest. We know that’s the main thing you’re looking for, but we also have to consider the other factors that make good value.
If you’ve never had one before, a term deposit is a cash investment that you place in a special account in a financial institution for a fixed time period (the term), in exchange for receiving a fixed rate of interest on your money. The money can usually only be withdrawn at the end of the term, unless you pay a fee to withdraw it early.
Term deposits are popular with investors who want a guaranteed return but also want to protect their capital from riskier strategies like the fluctuating share market.
Here some things to consider before taking out a term deposit:
The length of term
What terms are available? What rates apply to different terms? Knowing the responses to these questions will go a long way in terms of saving money tips.
We rate the full range of terms from short-term deposits of 1 month to 5-year term deposits. Institutions should offer a wide range of term lengths in order to cater for different appetites.
For example, short-dated terms of 1-12 months are suitable for those who don’t want to risk missing out on a rise in interest rates by tying up their money. Meanwhile, long-dated terms of 2-5 years are ideal for those who would prefer to keep their money safe from short-term dips in interest rates.
You need to decide what the ideal tenure is for your personal situation before opening a term deposit.
The application process
Applying for a term deposit should be the same as applying for a normal bank account – the same need to prove your identity, naturally, but not too many time-consuming forms.
It’s even easier if you already do your banking with that institution. You should be able to decide how much to invest, lock in an interest rate, and fill in a form online. It should be quick and easy and not require you to take time off to visit a branch in person.
If an institution requires you to open a deposit account in order to start a term deposit, check what the fees and other costs would be for that deposit account. Any account-keeping fees would just eat away the interest you receive from your term deposit.
Early exit or partial withdrawal
Here at Canstar, we consider how easy it is to make partial or full withdrawals of your term deposit from that institution, and whether any pre-payment or early withdrawal fees are charged. In our database across term deposits available in Australia, only 2 out of 104 term deposits allow you to withdraw part of your deposit (partial withdrawal) without charging any penalty. So it’s a good idea to shop around.
What if you need to access your money before the end of the term? No one plans to get caught in an emergency financial situation, but you don’t want your banking institution to rub salt in the wound. Thankfully, our database shows that 98 out of 104 institutions allow you to withdraw early for hardship without a penalty.
Maturity and renewal
While you might be stoked with securing an initial term deposit which will earn high interest, keep in mind the importance of what will happen when the term deposit matures. We consider how your term deposit maturing is communicated, and whether your term deposit renews automatically or not.
Automatic renewal of your investment can be a common pitfall, particularly if you assume that your money will be automatically renewed onto a similar interest rate. To avoid automatic renewal and instead shop around for a good rate, you should know whether or not your institution will notify you when the term is about to expire. Then you can make a note in your diary and do your research before it automatically rolls over.
We also consider how easy it is to rollover your term deposit if you decide that the renewal interest rate will suit. It should be easier than applying for a whole new term deposit from scratch.
The real rate of return
Term deposits are by their nature not a high-growth, high-risk investment option. So it’s important to work out what your “real” rate of return is by subtracting inflation from the interest rate you’re expecting.
For example, if your term deposit pays 4% and inflation is still sitting at 3%, your “real” rate of return is only 1%. That is, until the tax office gets to it! This is why it’s so important that we look around for a good rate for you.
We also consider what different options there are for how often you wish to receive interest pay-outs. You can usually receive interest either annually, or at the maturity of your term.
Finally, the overall return you get on your investment will be affected by any fees attached to a deposit account or the term deposit itself. Whether you pay these fees at setup or at maturity, they can add up to a fair chunk.
Compare Term Deposits with Canstar today!
What about when it comes to savings accounts?
Saving money is a good habit to have, but it isn’t easy. If you have managed to discipline yourself and put some funds aside, you’ll want to ensure that you get the best value possible from your all your hard work.
There are a variety of different savings accounts out there, so comparing savings accounts and choosing the right one for you and your goals can seem overwhelming. While there’s no one-size-fits-all account to suit every need, if you consider the following five important features, your choice may become a little easier.
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