The term deposit sweet spot: where to stash your cash

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Term deposit holders face a dilemma. Since the GFC they've experienced some extraordinary returns.

But premium rates on term deposits are falling fast. Last month saw a number of lenders drop both their fixed-rate home loans and term deposits; the longer-term accounts' rates are falling the most.

It's a strong pointer to the next movement in interest rates being down, not up. Westpac chief economist Bill Evans predicted that for Money readers back in August - although not all commentators agree even now. Several factors are driving rates down.

term deposit

Demand for home loans has slowed, which means banks don't need as much funding so they don't need to offer premium rates.

Then there's stockmarket volatility driving plenty of nervous investors back into cash. As Damian Smith, the chief executive of online financial comparison site Rate City, says: "When demand from investors for term deposits goes up, it's often the case that rates will come down."

If you want to maintain a defensive strategy and keep some of your cash in term deposits, you should be locking in for a longer rather than shorter term.

You could risk it all and put your cash in, say, an online account. After all, they are paying just a tad more than the 6% you could find for fixing for 12 months, but if rates do head south you will be caught out.

The "sweet spot", according to a fixed-interest specialist, is one year!

"While the one-year average rate is still above the 90-day average rate, you can see the differential is declining," says FIIG Securities director of strategy and market development Stephen Nash.

"Banks are slightly adjusting down their expectations of future RBA [Reserve Bank] rate rises and thus paying a little less for longer-dated deposits. This trend is even more pronounced in longer-dated rates from two to five-year maturity.

"At present the one-year rates seem to be the sweet spot."

Rate City says the best one-year term deposit deals are from the smaller players.

Investec Bank, for example, is currently offering 6.08% for 12 months on investments of $25,000, while Lifeplan Funds Management and IMB are sitting at 6.05% and 6% respectively. Worth noting here is that the federal government's deposit guarantee will be reviewed on October 12, 2011.

Nash says for an investor to lose out on locking in, say, a one-year 6% term deposit the cash rate would have to average greater than 6% over the year.

"Assuming a linear movement and starting at the current 4.75% level, the RBA cash rate would have to be above 7.25% in 12 months' time, which is very unlikely."

One of my pet problems with term deposits is securing as good a deal when you renew. Don't assume your money will be rolled over to a similar rate when the term is up. It's likely to be much lower.

There's a lot of work involved in moving term deposits from institution to institution to chase the best deal, which is why I like the sound of Australian Money Market (see breakout above). Mostly used by planners or brokers, although they do accept direct clients, it offers a streamlined process of shifting between institutions without having to do all the paperwork.

You fill in one application and when your term deposit expires they roll it over to the institution offering the best rate on the term you're after.

Rate City has launched a tool on its site which allows you to get a quote for your term deposit.

You simply enter your term deposit details, give them your email address and sit back and wait for the offers. It's still in its early stage, but the idea of compelling banks to bid for your business sounds great.

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Effie Zahos is editor-at-large at Canstar and a financial commentator. She is the author of A Real Girl's Guide to Money: From Converse to Louboutins, and a regular money commentator on TV and radio across Australia. In 1999, a background in banking Effie helped kickstart Money, which she edited until 2019. Effie holds a Bachelor's degree in economics.