Want a better return on your rainy day fund? Lock it in a term deposit

Term deposit rates have been falling for months now, but recently there have been a few good value options available for savvy savers who know where to look, Mozo data shows.

Savers looking to lock in a good rate of return have had a rough time lately, as term deposit rates have been trending down since July. And that trend has only continued in October, with 78 rate cuts in the past month alone.

Although the overall trend in term deposits was toward cuts this month, there were also 33 rate increases, mainly to four and six month terms. For 4 months, the highest rate on offer is 2.55%, from both ME and UBank, while those willing to commit to a 6 month term can snag a 2.80% rate from ME.

The best rate of return, however, is on offer for savers willing to lock their funds away for longer periods of time. One notable rate increase this month came from online bank RaboDirect, which upped its four year term deposit from 3.00% to 3.15%, making it the highest offer around for that term.

“Banks tend to give the best term deposit rates to people willing to lock their funds away for an extended period,” said Mozo Data Manager, Peter Marshall.

Best term deposits

• 4 months - 2.55% - ME and UBank
• 6 months - 2.80% - ME
• 1 year - 2.80% - ME and Police Bank
• 2 years - 3.00% - Police Bank
• 3 years - 3.10% - QBANK
• 4 years - 3.15% - RaboDirect
• 5 years - 3.25% - RaboDirect

According to Marshall, more generous offers on longer terms benefit banks by enticing customers to leave their money in one place for longer, while for savers, the higher rates help to factor in the chance of market rates going up in the period they’ve locked in for.

But Marshall says that being locked out of a potential RBA rate hike isn’t likely to be a problem for the next few months at least.

“The RBA isn’t likely to move on interest rates for the rest of the year, and there’s still a decent chance that when they do, it will be another rate cut, rather than a rise. So if you’ve got funds you don’t immediately need, a term deposit might be a savings strategy worth considering,” Marshall said.

Is a term deposit right for you?

If you’re considering a term deposit to grow your savings, then there are a few key questions you should ask yourself before locking in.

• What does your monthly budget look like? If your day-to-day budget is pretty tight, then setting aside a chunk of your savings and agreeing not to touch it for a certain period may not be practical. There are penalties for withdrawing your money from a term deposit early, so it’s best to only lock away funds you’re relatively certain you won’t need to use.
• Are you risk averse? One of the nice things about a term deposit is that it’s a safe way to grow your stash. So if you like to play it safe and steady with your savings, this might be the option for you. Other strategies, like investing in the sharemarket, for example, have a much greater risk factor - although they can have a higher rate of return as well.
• Do you need a little help to curb spending? If you often find yourself dipping into your long-term savings when you shouldn’t be, sticking that money in a term deposit can be a great way to force yourself to stop spending, since you’ll be penalised for withdrawing early.

Head over to our term deposit comparison tool to find the best option for your dollars.