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As term deposit offer rates fall even further, we wonder if you should look more closely at assessing 'risk' and broaden your view away from banks

As term deposit offer rates fall even further, we wonder if you should look more closely at assessing 'risk' and broaden your view away from banks

Now that all banks offer term deposit rates below 4%* for commitments of three years and less (and 4% for five years may soon be a thing of the past), the question becomes: is it worth the risk to take more risk?

In other words, what is the reward for investing in a term deposit with a lower credit rating than the AA- most main banks offer?

The first question you must satisfy yourself on however is whether credit ratings actually measure risks to you. Credit ratings are sought by the institutions themselves and it is they who pay the fees. Many investors remember reading about how overseas institutions (and some local ones) failed even though the ratings agencies had given them an acceptable rating.

Then there is the question of how you should view the ratings of BBB- and higher with those lower. This is the break point where ratings are considered 'investment grade' or 'sub-investment grade' (which is often referred to as 'junk', often unfairly).

You can see how the various rating levels compare across a number of the main ratings agencies, here.

Next, you should consider what the institution does with your money. Do they put it into personal or car loans?, into mortgages? or into business loans? With that information, which you can get from an investment statement or prospectus, you can understand better the quality of the risks the financial institution is taking and that will colour how you see the risks you are taking by investing with them.

You may also want to look at the leverage risk they are taking. Essentially, this shows how much capital the financial institution's shareholders have at risk compared to 'you' as a depositor. It can be scary. Typically banks run worse than 10 : 1 (that is $10 of depositors money to one dollar of shareholders money). You can see bank leverage data here. You will have to calculate you own number for non-banks but it is not hard if you can find their balance sheet in their latest prospectus.

Now you might be ready to assess interest rate returns.

There is nothing special about the 4% level but after tax it is at 2.7% pa which is getting threateningly close to inflation, especially non-tradables inflation which was 2.4% in March - although it has fallen away since then. (The recent falls are more to do with one-off's like the cuts in ACC and when they work though the rate will turn back up again.)

To get a 4% return from banks you will need to lock up your funds for five years, and probably expect no access before then. Check the details at BNZ (AA-), Heartland (BBB), and TSB Bank (BBB+).

With building societies, Nelson Building Society (BB+) will offer 4% for three years.

NZCU Baywide is the standout credit union which is offering much more than 4% for any term.

And Liberty Financial (BBB-) is the standout finance company, offering rates of 5% or more across most terms.

No one aspect - rate, credit rating, leverage, or business type - should be your determinant. Other items like track record, management ability, and the like may be influential for you as well.

But if you cast your review across more than just banks and stay away from concentrating your risk in just one institution or type of lender, you will find you have some options to achieve rates above 4%.

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.

All carded, or advertised, term deposit rates for all institutions for terms less than one year are here, and for terms one-to-five years are here.

Term PIE rates are here.

The latest headline rate offers are in this table. Remember, these are not where rates will settle to, just where they are at 9:00 am on Tuesday, October 27, 2015.

for a $25,000 deposit Rating 6 mths 1 yr 18 mths 2 yrs 3 yrs 5 yrs
               
AA- 3.35 3.50 3.50 3.55 3.60 3.70
ASB AA- 3.35 3.50 3.50 3.60 3.65 3.75
AA- 3.50 3.35 3.70 3.75 3.80 4.00
Kiwibank A+ 3.30 3.40   3.50 3.70 3.80
Westpac AA- 3.30 3.45 3.50 3.60 3.65 3.75
               
BBB- 3.45 3.45 3.60 3.70 3.80  
Heartland Bank BBB 3.50 3.70 3.75 3.80 3.85 4.00
HSBC Premier AA- 3.05 3.15 3.25 3.35 3.45 3.60
RaboDirect A 3.45 3.60 3.70 3.70 3.85 3.95
SBS Bank BBB 3.55 3.65 3.75 3.80 4.00  
A- 3.30 3.50 3.55 3.60 3.65 3.85

* = It is probably worth noting that ANZ's website just popped up a 3.57% rate for the special term of 7 months. There has been no publicity for this rate yet but it is higher than every other term deposit rate they offer for terms below 3 years.

Here are some selected options for building societies,

for a $25,000 deposit Rating 6 mths 1 yr 18 mths 2 yrs 3 yrs 5 yrs
               
Nelson Building Socy BB+ 3.50 3.65   3.80 4.00  
Wairarapa Bldg Socy BB+ 3.70 3.70        

The WBC 3.70% rate won't be available until Tuesday as a 'spring special'.

and here are some selected options from credit unions.

for a $25,000 deposit Rating 6 mths 1 yr 18 mths 2 yrs 3 yrs 5 yrs
               
NZCU Auckland NR 3.75 3.75 3.75 4.00    
NZCU Baywide BB- 4.25 4.40 4.55 4.55 4.55 4.55
NZCU South BB- 3.25 3.80 3.90 3.90    

And finally, here are some options from finance companies.

for a $25,000 deposit Rating 6 mths 1 yr 18 mths 2 yrs 3 yrs 5 yrs
               
Asset Finance B   3.65 4.80 5.25 6.00 6.60
Gold Band Finance NR 2.50 4.25 5.00 6.00 6.10 6.50
FE Investments B   6.00 6.50 7.00 7.30  
F&P Finance BB 3.80 4.00 4.10 4.25 4.40 4.60
Finance Direct NR 2.50 4.95 5.50 6.25 6.35 7.50
Liberty Financial BBB- 4.80 5.35 5.70 5.95 6.55 6.45
MAS BBB+ 3.50 3.60 3.60 3.65 3.70 3.80
UDC AA- 3.50 3.65 3.65 3.70 3.75 4.05

NR = this institution is Not Rated. It is not required to have a rating by the Reserve Bank because it is smaller than the minimum asset size for that requirement.

Term deposit rates

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9 Comments

The tone of this post seems to be indirectly cynical and subliminally says to me that savers in NZ are essentially screwed. Either we can be saved by deflation, which is an anathema to NZ, or we can live for today and go on a massive bender. Last time I received an annual report from Smartshares, there seemed to be less than 2000 investors with more than 60K in holdings. It doesn't appear that equities are a considered option. So what's left except for housing. P2P lending?

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Got time? Have some fun - check out;

http://www.theguardian.com/money/alternative-investments

What's cool is you can look at quoted prices in back articles, like say, this one:

http://www.theguardian.com/money/2002/feb/02/alternativeinvestment.jobs…

And compare prices today for similar items on TradeMe/eBay to understand the trends.
Check out these 2002 prices and then go have a look at what the same collectables are selling for today.

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Yeah sure. Actually one of the less obvious but good alternatives are rare toys and figurines from Japan. Also, movie and concert posters in mint condition, some of which could be sourced for little more than production cost. Rolling Stones poster from the 70s for USD350.

http://www.amazon.com/Shelter-Original-Poster-Maysles-Rolling/dp/B008SF…

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Have also mentioned these in the past;

http://www.samuraisword.com/articles/investments.htm

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"Money for nothing" interest rate policies have failed, bond guru Bill Gross said in a broadside Thursday against global central banks.

High-risk companies have been able to borrow on the cheap and stock markets have soared, but there's been little in the way of true investment to show for all the years of low rates, the Janus Capital fund manager said.

When central banks, particularly the Federal Reserve, began their aggressive easing programs, the thought was that boosting asset prices and lowering the cost of money would spur business investment that would flow through the broader economy.

The S&P 500 indeed has soared about 210 percent during the bull market that began in 2009. But as evidenced—again—by Thursday's tepid 2.3 percent quarterly gain in gross domestic product, aggressive growth has proved elusive.

http://www.cnbc.com/2015/07/30/gross-low-rates-are-the-problem-not-the-…

German Finance Minister Wolfgang Schaeuble said on Thursday that record low interest rates were causing considerable problems in Germany "A low interest rate leads to a misallocation of resources with all the risks and side-effects that you see when bubbles are forming," he said, adding that there was too much central bank money and debt in the world.

To quote Masaaki Shirakawa, former Governor of the Bank of Japan: “Monetary
policy can bring forward future demand to today by engineering lower real interest rates. But, when
tomorrow becomes today, the economy is faced with lower demand, which necessitates bringing
forward demand from the day after tomorrow.”14 Borrowing growth from the future is not sustainable.

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Mis-allocation, hmm no this happens as per my first line, there is no need for extra capacity as no one is buying because our grow for ever economic model has been is crippled by high energy prices and private debt as ppl struggle waiting for a recovery that has not happened, and will not.

While easing didnt spur investment, as there was not the demand,who really pays in a downturn? the SME. The trouble with listening to these financial types is they dont see and dont care about the small ppl IMHO. In fact I think they are parasitic on them.

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Good questions you ask DC. But maybe the good answers don't exist..

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All investors need to have some money on deposit and I personally would keep that with with the higher rated institutions;Anz/W'Pac/Rabobank and just accept the ever reducing interest rates in return for security and accessibility.
However,those with sufficient cash to satisfy their risk profile should certainly look more widely for income;The highest grade loans in Harmoney offer investors around 10% and of course,good quality equities, offer dividends which are still significantly higher than deposit rates.

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Have you heard of the OBR?

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