The New Year is bringing higher interest rates for borrowers – but what about savers?
This review looks at rates available now in 2017 for term deposit savers. (You can find an assessment of 2016 for term deposit savers here.)
There are some regulator-imposed benefits for banks if they fund their lending activity with longer maturities, and a large source of such funding are household deposits which tend to have very short commitments. This is a prime prospect pool.
But the more important issue for banks is cost. Wholesale suppliers of funds not only want the highest yield they can get, borrowing in these markets comes with fees, and they can be substantial (which is what merchant and investment banks who do these deals live off).
Market benchmarks like UST and NZGB yields underpin the wholesale rates, and are noticed here more directly in the interest rate swap rates. On top of this, banks must pay spreads and fees. A proxy for the spreads involved are the corporate CDS spreads, which we monitor here. (These are fairly low at present.)
These are the wholesale cost benchmarks that banks use to assess whether to seek funds from depositors, and the price they are prepared to offer. Borrower loan demand has its part to play as well, and at times is a critical factor.
Because the wholesale benchmarks are rising*, what banks are offering are rising as well.
You will notice in the table below that rates are relatively attractive for terms of nine months or so. Such funds don’t become useful for banks until they have a fixed duration of at least 1 year (in their Core Funding obligation). So winning your deposit commitment now gives them the chance to get you to roll it over for a slightly longer period, one that suits them better. The flicking of attractive rates between 9 months up to terms of 15, 18, even 24 months is what the bank professionals working with pricing their ‘liabilities’ are all about.
Unfortunately for them, each bank has a slightly different maturity profile, so a saver with term deposits will often have an interesting matrix of rates to assess.
The key thing for savers to do is be prepared to switch between banks. (And it can be wise to get established at a few of them in advance, just so the switch at decision time goes easily.)
The other key thing is to negotiate. We often hear that +0.05% is there just for the asking, and maybe more if you negotiate with a bank especially keen to win business at that time. (It may not be there for a ‘smallish amount’, or a bank who has their funding needs up-to-date.) You should ask, and you should check around. Our rate pages are a good place to help decide a short-list.
The other thing to note in the table below is the appearance again of 4%+ rates, and outside the banks, even 5%+ rates (even for investment grade institutions).
As we have earlier noted, savers may wish to think through the wisdom of locking up of funds for longer terms in what seems to be a turning rate environment. This situation should have savers thinking through the risk/reward scenarios.
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.
For savers rolling over a term deposit in the next week or two, here are approximately what you are rolling off:
|for a $25,000 deposit||3/4 mths||5/6 mths||8/9 mths||1 yr||18 mths||2 yrs||3 yrs|
Basically, you are facing lower rates now especially if you had a market-leading rate the last time, even though recent trends have seen rates rising slightly.
The latest headline rate offers are in this table.
|for a $25,000 deposit||Rating||3/4 mths||5/6 mths||8/9 mths||1 yr||18 mths||2 yrs||3 yrs|
|* = the only credit rating in this review that is not investment grade.|
Our unique term deposit calculator can help quantify what each offer will net you.
* True if you look over the past six months or so. But in the few trading days of 2017 these have been noticeably soft.