As term deposit offer rates fall even further, we wonder if you should look more closely at assessing 'risk' and broaden your view away from banks

Now that all banks offer term deposit rates below 4%* for commitments of three years and less (and 4% for five years may soon be a thing of the past), the question becomes: is it worth the risk to take more risk?

In other words, what is the reward for investing in a term deposit with a lower credit rating than the AA- most main banks offer?

The first question you must satisfy yourself on however is whether credit ratings actually measure risks to you. Credit ratings are sought by the institutions themselves and it is they who pay the fees. Many investors remember reading about how overseas institutions (and some local ones) failed even though the ratings agencies had given them an acceptable rating.

Then there is the question of how you should view the ratings of BBB- and higher with those lower. This is the break point where ratings are considered ‘investment grade’ or ‘sub-investment grade’ (which is often referred to as ‘junk’, often unfairly).

You can see how the various rating levels compare across a number of the main ratings agencies, here.

Next, you should consider what the institution does with your money. Do they put it into personal or car loans?, into mortgages? or into business loans? With that information, which you can get from an investment statement or prospectus, you can understand better the quality of the risks the financial institution is taking and that will colour how you see the risks you are taking by investing with them.

You may also want to look at the leverage risk they are taking. Essentially, this shows how much capital the financial institution’s shareholders have at risk compared to ‘you’ as a depositor. It can be scary. Typically banks run worse than 10 : 1 (that is $10 of depositors money to one dollar of shareholders money). You can see bank leverage data here. You will have to calculate you own number for non-banks but it is not hard if you can find their balance sheet in their latest prospectus.

Now you might be ready to assess interest rate returns.

There is nothing special about the 4% level but after tax it is at 2.7% pa which is getting threateningly close to inflation, especially non-tradables inflation which was 2.4% in March – although it has fallen away since then. (The recent falls are more to do with one-off’s like the cuts in ACC and when they work though the rate will turn back up again.)

To get a 4% return from banks you will need to lock up your funds for five years, and probably expect no access before then. Check the details at BNZ (AA-), Heartland (BBB), and TSB Bank (BBB+).

With building societies, Nelson Building Society (BB+) will offer 4% for three years.

NZCU Baywide is the standout credit union which is offering much more than 4% for any term.

And Liberty Financial (BBB-) is the standout finance company, offering rates of 5% or more across most terms.

No one aspect – rate, credit rating, leverage, or business type – should be your determinant. Other items like track record, management ability, and the like may be influential for you as well.

But if you cast your review across more than just banks and stay away from concentrating your risk in just one institution or type of lender, you will find you have some options to achieve rates above 4%.

Use our deposit calculator to figure exactly how much benefit each option is worth; you can assess the value of more or less frequent interest payment terms, and the PIE products, comparing two situations side by side.

All carded, or advertised, term deposit rates for all institutions for terms less than one year are here, and for terms one-to-five years are here.

Term PIE rates are here.

The latest headline rate offers are in this table. Remember, these are not where rates will settle to, just where they are at 9:00 am on Tuesday, October 27, 2015.

for a $25,000 deposit Rating 6 mths 1 yr 18 mths 2 yrs 3 yrs 5 yrs
AA- 3.35 3.50 3.50 3.55 3.60 3.70
ASB AA- 3.35 3.50 3.50 3.60 3.65 3.75
AA- 3.50 3.35 3.70 3.75 3.80 4.00
Kiwibank A+ 3.30 3.40   3.50 3.70 3.80
Westpac AA- 3.30 3.45 3.50 3.60 3.65 3.75

BBB- 3.45 3.45 3.60 3.70 3.80  
Heartland Bank BBB 3.50 3.70 3.75 3.80 3.85 4.00
HSBC Premier AA- 3.05 3.15 3.25 3.35 3.45 3.60
RaboDirect A 3.45 3.60 3.70 3.70 3.85 3.95
SBS Bank BBB 3.55 3.65 3.75 3.80 4.00  
BBB+ 3.30 3.50 3.55 3.60 3.65 3.85

* = It is probably worth noting that ANZ’s website just popped up a 3.57% rate for the special term of 7 months. There has been no publicity for this rate yet but it is higher than every other term deposit rate they offer for terms below 3 years.

Here are some selected options for building societies,

for a $25,000 deposit Rating 6 mths 1 yr 18 mths 2 yrs 3 yrs 5 yrs
Nelson Building Socy BB+ 3.50 3.65   3.80 4.00  
Wairarapa Bldg Socy BB+ 3.70 3.70        

The WBC 3.70% rate won’t be available until Tuesday as a ‘spring special’.

and here are some selected options from credit unions.

for a $25,000 deposit Rating 6 mths 1 yr 18 mths 2 yrs 3 yrs 5 yrs
NZCU Auckland NR 3.75 3.75 3.75 4.00    
NZCU Baywide BB- 4.25 4.40 4.55 4.55 4.55 4.55
NZCU South BB- 3.25 3.80 3.90 3.90    

And finally, here are some options from finance companies.

for a $25,000 deposit Rating 6 mths 1 yr 18 mths 2 yrs 3 yrs 5 yrs
Asset Finance B   3.65 4.80 5.25 6.00 6.60
Gold Band Finance NR 2.50 4.25 5.00 6.00 6.10 6.50
FE Investments B   6.00 6.50 7.00 7.30  
F&P Finance BB 3.80 4.00 4.10 4.25 4.40 4.60
Finance Direct NR 2.50 4.95 5.50 6.25 6.35 7.50
Liberty Financial BBB- 4.80 5.35 5.70 5.95 6.55 6.45
MAS BBB+ 3.50 3.60 3.60 3.65 3.70 3.80
UDC AA- 3.50 3.65 3.65 3.70 3.75 4.05

NR = this institution is Not Rated. It is not required to have a rating by the Reserve Bank because it is smaller than the minimum asset size for that requirement.