TERM DEPOSITS

Shop around as term deposit rates slide

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As cautious investors seek some relief from the trials and tribulations of the share market, banks have been flooded by cash deposits in recent months.

Indeed, the Australian Prudential and Regulation Authority (APRA) reports that the value of deposits held by Australian banks has reached $501 billion as of July 2011, up from $461 billion just over a year earlier. Yet despite the flight to cash, the long-term rates on term deposits have dropped over the same period.

The reason for this is fairly straightforward. Banks need to lend to make money, and are now competing more aggressively for the home lending dollar by dropping mortgage rates. As a consequence, they are offsetting potential losses by trimming term deposit rates, with some banks reducing rates by around 0.3 percent.

In this environment, the key to finding the best term deposit is to shop around, and a good place to start is an online comparison website like RateCity.

Generally speaking, the most popular term deposits are those with three and six month terms. At present, it appears some of the smaller financial institutions are offering the best deals on these terms, and for an initial deposit of $5,000 it is still possible to lock in a three month rate of 5.98 and 6.3 percent if you’re prepared to tie your money up for six months.

However if term deposit rates continue their downward spiral, some investors may contemplate a longer term deposit to take advantage of higher rates. In this instance, rates of 6.1 percent are available on a deposit of $5,000 locked in for 12 months, while there are also three year terms at 6 percent.

Yet, any decision about committing to a longer term should be made with the understanding that interest rates can change quickly and without notice. This means that even if you lock in a good rate for 12 months or more, there is a risk that short term interest rates could head north again in the meantime. One way to avoid being caught out is to spread your cash over varying time frames.

So, when it comes to managing your money, start shopping around for a new term deposit before the term runs out, because there is no guarantee you will get the same rate next time around.