Bigger gap means more money to save with a term deposit

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New research by RateCity shows the widening gap between term deposit rates. We look into what this means for investors and how you can get more for your dollar.

April 12, 2010

At a time when interest rates are rising and spending is tight, it is nice to know that there is a way to get more out of your hard-earned money.

Now is not only a great time to look at investing in a term deposit, but if you already have a term deposit account that's close to maturity, make sure you don't settle for your current financial institution's best rate because you could be missing out on earning more interest than you perhaps could have when you first locked it in.

Competition heats up
RateCity looked at the interest rates of more than 100 financial institutions in August last year and compared them to April this year. It was discovered that there is a widening gap in the range between the lowest and highest interest rates over the following terms:

    • 30 days: increased by 9 basis points
    • six months: increased by 51 basis points
    • 12 months: increased by 56 basis points
    • two years: increased by 23 basis points

The variances show the difference between the rates that financial institutions offer, meaning that there is more competition and greater reason for investors to compare online to find top rates when choosing term deposit accounts.

"It's common for the gap between low and high interest rates to widen when rates are on the upswing of the cycle because financial institutions move their rates at different times," says Damian Smith, RateCity's CEO.

"With the continued incline of rate rises over the past six months, many term deposit rates haven't yet caught up," he says.

"Money market rates, which are the rates banks use to lend against each other for fixed loans are generally used to determine term deposit rates. These rates have also been increasing which means funding costs for the banks are tight so term deposits are a great way for banks to increase their funding."

Invest wisely and get more for your dollar
RateCity also found that many term deposit interest rates have risen since August last year. The average rates for one-year term deposits has risen by 1.81 percent, from 4.01 percent in August to the current average of 5.82 percent. While the average six-month term has jumped by 1.59 percent from 3.64 percent compared to 5.23 percent in April this year.

At one of the best rates today of 6.56 percent for a one-year term deposit by RaboPlus, a $5000 deposit would earn you $328 compared to a lower rate of 4.00 percent which would return you with only $200 — that's a difference of $128!

It pays to shop around for a good-value term deposit account because after all, isn't hundreds of dollars in your pocket better than earned by your bank?


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