What are the best term deposit rates right now?

Term deposit rates, like savings account rates, are low at the moment and unlikely to rise substantially in the near future. Most of the big banks have now eased back on some of the term deposit rates they raised just two months ago. There is good news though. There are plenty of good term deposit rates available. And there are plenty of term deposit products paying more than the rates now available from savings accounts.

Term deposits vs savings accounts

To get a reasonable return in a low interest rate economy, savers have no alternative but to shop around and grab the best rates available. Some savings accounts are currently paying maximum rates (including bonus rate) of around 3.0 per cent. For example, the RaboDirect High Interest Savings Account is currently paying a variable maximum rate of 3.20 per cent. That makes at-call savings accounts competitive with term deposits, which require the saver to lock their money away for an agreed term.

However to get the maximum rate on a savings account, savers need to meet certain conditions, like make regular deposits, or make no withdrawals or have a linked transaction account from the same institution. The most common condition on savings account bonus rates is the introductory period. A savings account might have a good headline rate but it may only last for a few months. After the introductory period the rate may fall to the base rate which is likely to be much lower.

Term deposits are easy, fee-free and simple

In contrast to the conditions and rules that surround most savings accounts, term deposits are very straight forward. Term deposits generally charge no fees at all and have rules that are easy to understand. The only way you will not get paid the full headline interest rate on a term deposit is if you apply to withdraw your money before the end of the term.

To get the advertised interest rate on a term deposit, you don't need to take out a linked transaction account, or make regular deposits. A term deposit rate doesn't apply for a few months then fall to a base rate later on. If a term deposit headline rate is 3.0 per cent and you have $10,000 to invest, you will get $300 in interest per year. You will get more than $300 if you opt to reinvest your interest back into the deposit.

Be an active saver – and get the most from your term deposits

OK, so you have decided to invest in term deposits and you are looking for the best rate available. But what if rates change and go up while your money is stuck in a lower rate term deposit? What if you need a bit of cash in a hurry but all your money is locked away for the next few years?

Many financial experts say term deposits should not be a “set and forget” investment. Term deposit rates are always changing. Banks and credit unions raise and lower their term deposit rates a lot. To get the best rate, savers need to be prepared to actively manage their money and move it around as required.

If you can, don’t put all your money into the highest rate term deposit product you find and leave it there. That is a passive strategy and could see you getting a lower rate than is available. Active savers get a better deal because they are always on top of the best rates at any particular time.

How to be an active saver

Active savers break up their money into smaller amounts and spread it around a number of term deposits of different lengths.

For example, you might have some cash tied up in the Commonwealth Bank’s three year term deposit now paying 3.20 per cent. That is a great rate, but you don’t want all of your savings tied up for that length of time.

So you have some of your savings invested in a three month term deposit paying 3.0 per cent from MOVE. At the end of the three months, rates may have changed and you might be tempted to switch your cash to a six month term at ME Bank which is also currently paying 3.0 per cent.

You might have some cash invested in a two year ANZ Advance Notice term deposit paying 3.20 per cent or an ING DIRECT 12 month term deposit paying 3.0 per cent.

By not locking all your cash away in one long term deposit, you can stay on top of the best rates available at any one time. You can access some of your money when your shorter term deposits mature and you can adjust your strategy as rates and your needs change.

Fight term deposit “roll-over risk”

By taking an active approach to your term deposits, you minimise your ‘rollover risk’. The Australian Securities and Investment Commission has warned savers that term deposits that are left to expire are often rolled over by banks and credit unions to another term deposit of the same length. However rates have probably changed, and possibly fallen, since you invested in the original term deposit, leaving you stuck in a new term deposit paying a much lower rate. Avoid rollover risk by being an active manager of your savings. When your term deposit is approaching maturity (the end of the term), start looking around for the best rates available and move your money to the highest returns you can find.

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