Published in The Australian 27 February 2016
There’s been a quiet revolution going on in the deposit market. Two of the major banks have started competing for deposit funds, increasing the interest rates on offer
The expectation is that deposits rates could move even higher this year because the cost of funds is rising for banks. However, we expect there will also be at least one more official interest rate cut, potentially seeing deposit rates ratchet down to last years’ lows.
While spreads on term deposit rates have generally declined over the last year, there has been a pick up since the low point at the end of the year. If we consider the one year margin or spread over the benchmark swap, the margin was approximately 82 basis points (100 basis points = 1.00%) (bps) at the start of 2015, then reached a low of around 40bps late in the year, but since then has risen to around 60bps in early February 2016.
Spreads on 90 and 180 day term deposits have also improved from the same low point.
Source: FIIG Securities
The four major banks raise substantial funds in global markets to help fund their operations with over $100 billion raised last year. Last year this market was cheap compared to others.
But, over the last few months the cost to borrow in foreign currencies has risen. Like any borrower wanting to minimise costs, the banks look to raise funds in the cheapest markets, and domestic deposit markets are again looking relatively attractive.
Deposit rates beginning with a ‘two’ were common in 2015, this year the magic ‘three’ handle is more common. Current specials from two regional banks offer 3 per cent for both 180 days and for a year. Major bank rates for six months are between 2.6 per cent and 2.8 per cent. The range for other regional banks and credit unions over six months is even wider at 2.05 to 3.0 per cent. This means investors that shop around can get better rates.
Term deposits for 90 day terms are more consistent and a good current rate is 2.85 per cent.
The best five year rate has improved to 3.4 per cent. Even though it’s a long term, it is a good pick up in rate for a very low interest rate outlook. Especially if you consider the 10 year government bond rate is 2.42 per cent.
The best rates for each of the various terms are not routinely offered by one or two institutions. What we are finding is that specials are offered on the terms where the institution needs to raise funds. Importantly, if you add up all of the rates on offer from a single financial institution and divide it to get an average, there’s little difference between any of the authorised deposit taking institutions.
How do you get the best return on your deposits?
Our best suggestion is to keep some funds ‘short’ so that if deposit rates rise, you can take advantage of market conditions. But also invest some for longer, say a year to 18 months just in case rates don’t rise, and we do get another cash rate cut or two.
Some of the best rates on offer are online but older investors are hesitant to invest this way. They like the simplicity of a vanilla term deposit. So, even if you don’t want to change banks, have a look online and ask your bank if they will match the advertised rate somewhere else.
Retail investors commonly invest for six month terms, which the banks know, so don’t usually offer attractive rates in this bucket. They want retail investors to commit for longer, reducing paperwork, so offer better rates for slightly longer terms such as nine months. If you can invest for a bit longer you may be rewarded with higher rates.
Don’t just let your term deposit roll with the same institution, particularly over six month terms.
Some term deposit brokers use one product disclosure document enabling you to invest across multiple banks, making it easy to change banks or periods to find the best rate.
Note: Rates discussed are accurate as at 24 February 2016 but subject to change.