The Red Bank leads term depost rates down into new uncharted, low territory leaving their 'replicating portfolio' clients with record low returns

A month ago we warned that term deposit rates had sunk to all-time lows – at least since 1966.

Well, now they have gone even lower.

Westpac is leading the way down, no doubt protecting their margins as borrowing rates fall too. Although to be clear, home loan rates have been pretty much unchanged for a few weeks now.

Westpac’s ‘leadership’ has opened up quite a rate disadvantage for them on the term deposit front.

Their new six month rate is now -15 bps below any of their main rivals and -30 bps below RaboDirect and Heartland.

Westpac’s new low one year rate is now only 3.55% (3.45% if you want monthly cash flow) and -25 bps below Kiwibank and BNZ. It is -30 bps below Heartland for one year.

For longer terms they are pitching their new rates low as well, far below their main rivals and the challenger banks.

They are relying on their ‘replicating portfolio’ – in other words lazy customers who just roll over, perhaps without noticing, perhaps feeling that there is just too much effort required to shift to another bank.

The difference between Westpac’s 3.55% for one year and the 3.80% on offer from a number of other banks, if you had a term deposit of say $50,000, is $125 (less tax). At 3.80% you would earn $1,900 gross. At Westpac’s 3.55% you would earn $1,775 gross.

At record low returns you would think savers would work even harder to retain any gain. Switching banks is undoubtedly worth $175 of your time. It’s not hard at all.

Westpac is probably unconcerned. They earn their income when they lend. And they can source funds wholesale for much less than from retail term deposit (most of which are small from their perspective and therefore require considerable servicing expense). So long as they meet their core funding obligations, and they do, Westpac could probably care less whether you are attracted to their term deposit rate or not. They can live very well off that ‘replicating portfolio’ of long-term lazy clients. They won’t be feeling any pressure to offer a competitive rate – and in their eyes, a ‘competitive rate’ will include their wholesale options.

Will term deposit rates keep going lower from here? Who knows, but probably. The next Reserve Bank OCR will undoubtedly cut 25 bps from that benchmark although that move is already priced in to wholesale markets.

Savers should be rooting for Janet Yellen to start raising US benchmark rates, but that too seems less likely than it did a few months ago.

So, what to do? There are options but almost all of them require you to take more risk on board. One that doesn’t involves using term PIE accounts, but that only squeezes a small benefit out for you.

Or you could shift to using managed funds. In fact some KiwiSaver funds can be a good option. (When you reach 65, never close your KiwiSaver account because you cannot get back in again.) But any alternate is going to require some work by you to understand what the risks are and an assessment of whether that risk is worth the reward. There are more options than managed funds of course, and we will explore those in a separate article.

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 9:00am on Monday, August 31, 2015.

for a $25,000 deposit 6 mths 1 yr 18 mths 2 yrs 3 yrs 5 yrs
3.55 3.70 3.80 3.85 3.90 4.00
ASB 3.55 3.70 3.85 3.90 3.95 4.05
3.60 3.80 3.85 3.90 3.95 4.10
Kiwibank 3.60 3.80   3.85 4.00 4.40
Westpac 3.40 3.55 3.70 3.75 3.80 3.90

3.50 3.70 3.90 4.00 4.10  
Heartland Bank 3.70 3.85 3.95 4.00 4.10 4.25
HSBC Premier 3.30 3.40 3.60 3.75 3.80 3.90
RaboDirect 3.70 3.80 3.85 3.90 4.05 4.25
SBS Bank 3.60 3.80 3.85 3.90 4.00  
3.60 3.80 3.90 4.00 4.10 4.40
Gold Band Finance 2.50 4.50 5.25 6.15 6.25 6.50
F&P Finance 4.10 4.30 4.35 4.50 4.60 4.80
UDC 3.60 3.75 3.80 3.85 3.95 4.25