Term Deposit Rates Slide Further But Can Savers Still Find Value?

Imagine getting a 7% p.a. return on a term deposit. While this may seem fanciful in today’s market, that was the average interest rate not too long ago.

The recent Reserve Bank decision to cut the official cash rate to a record low of 1.25% was followed by a flurry of rate changes among term deposit providers, the majority of which were downward. Canstar data shows that the average rate on a 12-month term deposit dropped to a low of 2.17% p.a. the week after the rate cut.

Set the clock back to August 2008 and the average return was a mouthwatering 7.62% p.a according to Canstar data. So, what’s changed in the last 11 years? Why are term deposit returns so much lower? Could they fall even lower? And is there still good value out there for savers?

Why have term deposit rates fallen?

Canstar’s finance expert Steve Mickenbecker said that while a term deposit rate of more than 7% p.a. might sound great by today’s standards, in 2008 the difference between term deposit rates and the cash rate was similar to what we’re seeing today.

In August 2008, the official cash rate was 7.25%, well above the 4.5% rate of inflation for the most recent quarter at that time. This was before the RBA began a series of cuts to lower the cash rate to 3% a year later, followed by a couple of years of hikes and then more cuts.

“The relativity between cash rate and term deposit rates today and in 2008 is not so different,” Mr Mickenbecker said. “The average 12-month term deposit rate is around 5% lower today than it was then, and may well fall further as banks are still announcing their cuts following the RBA’s decision.”

The recent cut marked the first change to the official cash rate in nearly three years. As a result, many lenders have reduced mortgage rates, passing along all or part of the 0.25 percentage point cut to home loan customers. At the same time, some institutions have reduced the interest rates they offer on savings accounts and term deposits, meaning smaller returns for those savers affected – particularly risk-averse investors like retirees, home deposit savers and other groups looking for a guaranteed return.

With another cash rate change anticipated later this year, Mr Mickenbecker says term deposit rates are likely to continue falling.

“Unless there is an unexpected improvement in the economic fundamentals, a further cash rate cut looks inevitable some time in the next three months,” he said. “If the RBA does move down, then there will be further term deposit rate drops.”

Some of the highest term deposit rates on Canstar’s database

The following table displays a snapshot of term deposits with a term range between 12-24 months with interest paid as specified in the table below. The results shown are based on an investment of $100,000 in a personal term deposit and are sorted by the highest advertised interest rate for a 12-month term, and finally by lowest payment frequency. For more information and to confirm whether a particular product will be suitable for you, check upfront with your provider and read the Product Disclosure Statement before making a decision. 

Term deposit rate movements – the ups and downs

Many providers were quick to respond to the cash rate decision, with multiple institutions lowering term deposit rates – some making cuts over and above the RBA rate change. Canstar reported 363 decreases across terms from 39 providers in the week following the cash rate announcement. The biggest drop came from ANZ, which lowered interest rates by a maximum of 0.60 percentage points. The remainder of the big four have also decreased some of their term deposit rates. 

Big Four Term Deposits – Biggest Rate Decreases
Bank Product Rate Change (Percentage Points)
ANZ Advance Notice Term Deposit (5 months) -0.60
Commonwealth Bank Term Deposit (4 months) -0.50
NAB Term Deposit (1-2, 5-11 months) -0.25
Westpac Term Deposit (5 years) -0.50

Source: Canstar Research as at 14 June 2019

Some smaller banks and institutions also reduced their term deposit rates. Bank of Melbourne, Bank of Sydney, BankSA, BOQ and St.George Bank all lowered their interest rates by up to 0.50 percentage points on some of their term deposit products.

But it’s not all doom and gloom. While the majority of movements have been downward, Canstar also observed some rate increases from the big four and other institutions. Notably, ANZ boosted interest rates by 0.55 percentage points on its 11 month Advance Notice Term Deposit. A handful of other banks also made increases to term deposit returns, ranging from 0.05 to 0.25 percentage points. For example, Bank of Melbourne, BankSA, BOQ and St.George all increased the rate of some of their term deposit products by 0.25 percentage points.

Big Four Term Deposits – Biggest Rate Increases
Bank Product Rate Change (Percentage Points)
ANZ Advance Notice Term Deposit (11 months) +0.55
Commonwealth Bank Term Deposit (5 months) +0.40
NAB
Westpac Term Deposit (4 month) +0.25

Source: Canstar Research as at 14 June 2019

Highest term deposit rates on Canstar’s database

With so many providers changing their rates in both directions, now could be a good time to take a look at what’s available across the market.

One-year term term deposit rates

The table below shows the five highest rates available for personal term deposits on Canstar’s database at the time of writing for a deposit of $50,000 invested for one year, with interest paid at the end of the term or annually:

Product Interest paid Interest rate
  • Qudos Bank Term Deposit
Annually 2.50%
  • Community First Credit Union Term Deposit
  • Firstmac Term Deposit
At maturity/annually 2.45%
  • Bank First Term Deposit/1 Year Regular Income
Annually 2.40%
  • QBank Term Deposit
At maturity 2.35%
  • CUA Term Deposit
  • Rural Bank DIY Super Term Deposit/Personal Term Deposit
  • Hunter United Term Deposit
  • People’s Choice Credit Union Term Investment
  • Summerland Fixed Term Deposit
  • Teachers Mutual Bank Term Deposit l10
  • UniBank Term Deposit l10
At maturity/annually 2.30%

Source: Canstar’s comparison tables as at 28 June 2019

Five-year term term deposit rates

For investors with a longer time frame in mind, here are the five highest rates available on Canstar’s database at the time of writing for a deposit of $50,000 invested for five years, with interest paid at the end of the term:

Product Interest paid Interest rate
  • Summerland Fixed Term Deposit
At maturity 2.35%
  • Credit Union SA Term Investment
  • CUA Term Deposit
At maturity 2.30%
  • Gateway Bank Term Deposit
At maturity 2.25% compounding annually (2.20% compounding semi-annually, 2.15% compounding monthly)
  • Greater Bank Term Deposit
At maturity 2.20%
  • BankVic Term Deposit (l20)
At Maturity 2.15%

Source: Canstar’s comparison tables as at 28 June 2019

Image Source: WANVISA KEAWKAM (Shutterstock) 

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