Is now the time to lock in a term deposit?
After years in the doldrums, 10 consecutive interest rate rises have breathed life back into the term deposit market and helped revitalise them as a more compelling option for savers looking for a relatively low-risk home for their money.
The turnaround in fortunes for term deposit rates has been rapid over the past year says Peter Marshall, banking expert at financial comparison website Mozo.
"Even looking back a year ago rates across the board were quite low and there was very little movement. The best rate for a one-year deposit was 1.60% p.a., but over the last year that's been increasing quite rapidly, so you can now get almost 4.50% p.a.
"Looking at five-year rates, the best rate was only a little above 3.00% p.a. a year ago, and that's getting up around 5.00% p.a. now."
But with plenty of speculation that the RBA may be nearing the end of its cash rate hiking cycle, are term deposit rates about as good as they're going to get - at least, in the near-term?
"I think if someone wants to lock in a longer term deposit rate and get a really good rate, they need to act fairly quickly," Marshall says.
"As soon as the banks have some more confidence that the RBA is going to start cutting rates in the next few months, they will start chopping their longer term deposit rates. If the RBA doesn't move again at their April meeting we may well see a lot of longer term deposit rate options start to head down."
A short-term play?
For Luke Smith, financial planner and director of Envision Financial, term deposits are finally starting to show promise after years of meager returns and provide more risk-adverse investors with a relatively secure fixed income option.
"The capital protection element of a term deposit gives a lot of people piece of mind," he says.
"I think there's been a big increase in the safety perception of a term deposit and we're now starting to actually get rewarded for locking up our money in that type of investment because for the last decade, we've been hard pushed to get a decent return out of the sector."
Despite the lure of rates approaching the 5.00% p.a. mark on longer, Smith says that he would still be looking at a short-term option until the interest rate landscape is more settled though.
"For the vast majority of last year we looked at three and six-month rolling timeframes, because when you're in an interest rate environment that is rising and rising and rising, you don't want to commit for too long and increase the likelihood of being out of the market in relation to your rate of return.
"So I would be inclined to maintain shorter durations, and then review them and execute depending on what happens with cash over the next three to six months."
The matter of inflation
With annual inflation currently running at 7.4%, investors will be finding it difficult to make a real rate of return on their money - and that's certainly the case with term deposits. Smith says that, ultimately, the inflation issue means that investors will have to weigh up their risk appetite.
"Investors need to consider what's more of a concern for them: is the security of being out 2% or 3% in real dollar terms with a term deposit better than being out 7% or 8% if equity markets or other assets come under pressure?"
"I think people need to accept that they're going to a term deposit for capital security, for a fixed rate of income and no volatility, and then they can use other parts of their portfolio to try and offset inflation, depending on how they feel about risk and what they want to try and do to achieve a positive net return on their money."
The banks offering the best term deposit rates
So for those who are eying off a term deposit as an option, which banks are currently offering the highest rates? That will depend on the amount of time someone is willing to lock their money away for, as terms can range from as little as one month up to five years.
However, Marshall notes that the likes of AMP, Goldfields Money and Judo Bank - all of whom are 2023 Money Best of the Best award winners - are among the most competitive banks around on the term deposit front at the moment.
"Judo is a bank that will often have some of the best rates available, but there are other banks that are trying to challenge them - places like AMP and Goldfields Money that are putting forward rates that are often as good or even a little bit better than Judo.
"Having said that, it's not unusual to see some of the big banks starting to push rates higher because we've just had NAB push their rates higher to be quite competitive now. So it's not hard to find rates about 4.00%, but if you want something closer to 5.00% you will have to look around a bit."
Before locking any money away though, Marshall does encourage would-be depositors to be aware of any early withdrawal conditions attached to an account - especially if there's a chance that the money will need to be taken out before the deposit comes to term.
"If you are going to consider taking out a longer term deposit, make sure you check what the financial penalty is if you happen to need to withdraw that money early," he says.
'It's fairly typical for financial penalties to be reasonable, so perhaps a 50% interest reduction, but there are products out there that will withdraw most of the interest that they paid you - even if you're four out of the five years through your deposit term."
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