Are term deposits worth it in 2020?
Friday 06 March 2020
The Reserve Bank’s continuous cuts to the official cash rate over the past 10 years, have left interest rates for term deposits, savings accounts and home loans at an all time low. While back in 2011 you could easily snag a term deposit with an interest rate over 6% p.a., these days you will be hard put to find one higher than 2%*.
But if you’ve got a lump sum to put away, you’ll be interested to hear that average interest rates for 6 month, 1 and 5 year term deposits are actually, currently higher than the average ongoing interest rate for savings accounts, which stands at a pitiful 0.97% p.a.*.
Pros of putting your money in a term deposit in 2020
1. Fix your interest rate
There is speculation that April will see another RBA cut and with the world in an increasingly volatile position, sticking with a fixed interest rate might not be such a bad thing.
It doesn’t look like interest rates will be going up anytime soon, so although it is still possible to find a savings account with an ongoing interest rate above 2% p.a., as savings rates are variable, your rate will be liable to go down as market rates go down.
Term deposits, on the other hand, offer you a chance to lock in an interest rate for an agreed period of time. Let’s look at a quick example of that:
If you had put $10,000 in a 5 year term deposit back in 2015, with an average interest rate of 3.36% p.a, you could have made about $1,680 interest altogether. But that was just the average rate, if you had sought out the most competitive term deposit rate at the time (4.00% p.a with G&C Mutual Bank) you would have made about $2,000 worth of interest over 5 years*.
2015 average term deposit rate vs. most competitive ongoing savings rate
|Year||Term Deposit||Savings rate|
|2015||3.36% p.a.||4.00% p.a. (ING)|
|2016||3.36% p.a.||3.60% p.a. (ME Bank)|
|2017||3.36% p.a.||3.05% p.a. (ME Bank)|
|2018||3.36% p.a.||3.00% p.a. (AMP)|
|2019||3.36% p.a.||2.90% p.a. (CUA/MOVE Bank)|
Finally, the most competitive ongoing savings rate you can find in 2020 is 2.25% p.a. with neobanks Xinja, 86 400 or Up Bank.
A savings rate might look more tempting in the short term, but depending on how long a term you opt for and the conditions attached to the account, in the long run a term deposit might be able to snag you more interest. If you had put your money in a term deposit, even just 12 months ago, just like Liberace you’d probably be laughing all the way to the bank right now.
2. Low maintenance
With a term deposit usually, what you see is what you get. At the beginning of the term you deposit a fixed sum of money, at a fixed annual rate for an agreed period of time. During the length of the term all you have to do is sit back and either wait for the interest to roll over to your linked transaction account monthly, or if you opted to have it paid out at maturity, collect a neat bundle of interest at the end of the term, along with the rest of your money.
Of course, despite being fairly low maintenance, the downside of a term deposit is that you won’t be able to access your money before the end of the term. If you suddenly find that you need to access your funds, you will most likely be hit with a break fee and a reduced interest rate. So before you sign up, be 100% positive that you can sacrifice this amount of money for the period of time.
3. Lock money away for a rainy day
If you constantly struggle to tick all the boxes needed to receive the maximum ongoing interest rate with a savings account, then tucking a sum of money away into a term deposit for 6 or even 12 months could help to build up a bit of extra cash for a rainy day.
You could think of it as a backup fund to get you through any life changes you have planned.
Keen to find a term deposit to stash your cash in? Why not take a look at the terms on offer below or head to our compare term deposits page for more options.
*Average interest rates based on current and archived term deposit interest rates available in the Mozo database, correct as of 1 March 2020.