Aussie savers have taken a beating this year, with three cuts to the Reserve Bank of Australia’s cash rate bringing interest rates down to the lowest point on record.
Term deposits have had a particularly bad go of it in 2020, with the average 12-month term deposit with a balance of $20,000 falling from 1.40 per cent on April 1st to 0.63 per cent on December 14th.
However, term deposits are not to be scoffed at. There are still some valid reasons why term deposits are worth using as we move into 2021.
1. Term deposit providers have hiked rates
It’s not all doom and gloom in the world of term deposit interest rates.
In fact, there are some providers who’ve bucked the trend and increased interest rates since the last RBA cash rate cut in November.
AMP Bank increased multiple term deposit accounts by between 15 and 20 basis points following the cut. Challenger bank, Judo Bank, also lifted interest rates on a number of term deposits by up to 9 basis points.
|Term deposit provider||Rate increase range||Date of increase|
|AMP Bank||0.15% - 0.20%||09/11/2020|
|Bank of Us||0.05% - 0.15%||18/11/2020|
|Citi||0.10% - 0.15%||07/12/2020|
|Judo Bank||0.01% - 0.09%||09/12/2020|
Source: RateCity.com.au. Data accurate as of 15/12/2020.
Note: Rate hikes for a range of term deposit terms and interest payment frequencies. For a full list of every term deposit hike, please contact RateCity for more information.
If you’d given up on seeing rates rise on deposit accounts for some time, keep in mind that providers are still fighting to make term deposits competitive for Aussie savers.
2. Savings account rates get cut out-of-cycle
One of the biggest benefits of using a term deposit to store your money is that your interest rate is locked away for a set period of time. Even if the RBA cut the cash rate every month for the duration of your term deposit, your rate would not budge.
Comparatively, savings account rates are not only subject to the whims of variable interest rates in the market, but providers cutting rates out-of-cycle. This is, unfortunately, a common occurrence.
RateCity research found that in the months between cash rate cuts this year – April to the end of October – 92 providers cut interest rates out-of-cycle with the RBA. In fact, only last week we saw Australia’s biggest bank – CBA – cut savings rates for a second time, right before Christmas.
It’s challenging to say when the RBA will lift the cash rate again. But it is still potentially likely that your provider may cut your savings account interest rate due to the frequency of out-of-cycle rate cuts this year. However, if you’ve locked in a term deposit rate, your interest will stay unchanged for that period of time.
3. Backed by the government guarantee
Unlike other investment options, term deposits are supported by the Financial Claims Scheme, also known as the government guarantee. Meaning, that deposit-holders with authorised deposit-taking institutions (ADIs) are backed up to the value of $250,000 per account holder per ADI, in the event the provider were to go under.
Other investment options, such as shares, EFTs, investment bonds and even the property market (outside of your home loan) are not backed by this guarantee. There is a greater level of risk involved when investing your money in other areas.
In a time of relative uncertainty, you may be looking for a more stable investment option. While your return may not be as high, your nest egg is at least protected in the event things go belly up – up to the value of $250,000.
4. Term deposits help ease financial uncertainty
If this year has taught us anything it’s that we cannot predict the future. And this is where term deposits really shine, as they offer a level of financial certainty other savings or investment options cannot.
Although RBA Governor, Philip Lowe, stated “the board is not contemplating a further reduction in interest rates,” 2020 has shown that there’s no guarantee that interest rates won’t fall further. Whether cut by the RBA or reduced out-of-cycle by your provider.
Many financial experts have recommended Aussies seriously consider the benefits of fixing interest rates right now - particularly for home loans.
In response to the question ‘should I fix my home loan rate’, Financial Adviser, Paul Clitheroe, stated he had “argued against fixing home loan rates for nearly 40 years” but now “it is hard to see how you could seriously disadvantage yourself” by fixing your home loan rate.
But does this same logic apply to your savings account? It all depends on whether you believe that interest rates could fall further.
As a term deposit locks in your interest rate for a set period of time, you know exactly how much interest you will be earning over that time frame. If you’re looking for a savings or investment option with relatively low risk – a term deposit may suit your financial needs.