Sharp turn: long-term deposits on the downswing

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October 13, 2010

Investors who choose short-term term deposits have been getting the raw end of the stick for quite some time, with rates much lower than longer terms. But according to new findings by RateCity, short-term term deposits are making a comeback while longer terms are falling off the tracks.

The study recorded data from one-, three-, six-, 12- and 36-month term deposit accounts across more than 100 financial institutions in RateCity's database based on a $50,000 deposit. It found sharper falls to longer-term term deposits such as the average three-year rate fell 18 basis points since June to 6.26 percent, while shorter terms have increased including the average three-month term jumped up by 11 basis points to 4.90 percent. This is compared to the Reserve Bank's official cash rate remaining at 4.50 percent since May.

Major four rates lower
RateCity also discovered that the big four banks (Commonwealth Bank, ANZ, Westpac and NAB) have reduced many of their rates for term deposits. According to the benchmark rates (the average of the major four), three-year term deposit rates decreased from 6.5 percent in July to 6.17 percent in October. The rates for three- and six-month term deposits also fell while 12-month rates were unchanged.

Long-term rates lower but still better
While some of the longer term rates have decreased, many are still more attractive than shorter-term offers. But the catch is that you have to lock your money away for longer or face a penalty fee.

For instance, the current average rate for a 12-month term deposit is 5.91 percent, which is 1.01 percentage points higher than the average three-month term at 4.90 percent. With a $50,000 deposit, after three months you would have earned $612.50 from the shorter term, and compared to the 12-month term, after three months your savings would have accumulated about $739. That's a difference of $126.50 after three months. Remember though, that you may not be able to access your return until the term deposit ends.

Get more than average
If you are an investor wishing to invest your hard-earned cash, there is a way that you can earn more than the current average rates. For instance, one of the best six-month term deposits for a $5000 deposit listed on RateCity is 6.21 percent by RaboDirect. This is 74 basis points higher than the average rate of 5.47 percent. Just by depositing $5000 into this account you could earn yourself $155 at maturity. Compare term deposits and show your financial institution that you won't take their "average" rate by switching to a better deal.



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