We review what is on offer to term deposit savers, what is currently driving rates, and how to benefit from what appears to be a rising market

The New Year is bringing higher interest rates for borrowers - but what about savers?

This review looks at rates available now in 2017 for term deposit savers. (You can find an assessment of 2016 for term deposit savers here.)

There are some regulator-imposed benefits for banks if they fund their lending activity with longer maturities, and a large source of such funding are household deposits which tend to have very short commitments. This is a prime prospect pool.

But the more important issue for banks is cost. Wholesale suppliers of funds not only want the highest yield they can get, borrowing in these markets comes with fees, and they can be substantial (which is what merchant and investment banks who do these deals live off).

Market benchmarks like UST and NZGB yields underpin the wholesale rates, and are noticed here more directly in the interest rate swap rates. On top of this, banks must pay spreads and fees. A proxy for the spreads involved are the corporate CDS spreads, which we monitor here. (These are fairly low at present.)

These are the wholesale cost benchmarks that banks use to assess whether to seek funds from depositors, and the price they are prepared to offer. Borrower loan demand has its part to play as well, and at times is a critical factor.

Because the wholesale benchmarks are rising*, what banks are offering are rising as well.

You will notice in the table below that rates are relatively attractive for terms of nine months or so. Such funds don't become useful for banks until they have a fixed duration of at least 1 year (in their Core Funding obligation). So winning your deposit commitment now gives them the chance to get you to roll it over for a slightly longer period, one that suits them better. The flicking of attractive rates between 9 months up to terms of 15, 18, even 24 months is what the bank professionals working with pricing their 'liabilities' are all about.

Unfortunately for them, each bank has a slightly different maturity profile, so a saver with term deposits will often have an interesting matrix of rates to assess.

The key thing for savers to do is be prepared to switch between banks. (And it can be wise to get established at a few of them in advance, just so the switch at decision time goes easily.)

The other key thing is to negotiate. We often hear that +0.05% is there just for the asking, and maybe more if you negotiate with a bank especially keen to win business at that time. (It may not be there for a 'smallish amount', or a bank who has their funding needs up-to-date.) You should ask, and you should check around. Our rate pages are a good place to help decide a short-list.

The other thing to note in the table below is the appearance again of 4%+ rates, and outside the banks, even 5%+ rates (even for investment grade institutions).

As we have earlier noted, savers may wish to think through the wisdom of locking up of funds for longer terms in what seems to be a turning rate environment. This situation should have savers thinking through the risk/reward scenarios.

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.

For savers rolling over a term deposit in the next week or two, here are approximately what you are rolling off:

for a $25,000 deposit 3/4 mths 5/6 mths 8/9 mths 1 yr 18 mths 2 yrs 3 yrs
  % % % % % % %
Average rate 2.78 3.32 3.40 3.49 3.54 4.72 4.78
Maximum rate 3.60 3.70 3.75 3.80 3.90 5.00 5.05

Basically, you are facing lower rates now especially if you had a market-leading rate the last time, even though recent trends have seen rates rising slightly.

The latest headline rate offers are in this table.

for a $25,000 deposit Rating 3/4 mths 5/6 mths 8/9 mths 1 yr 18 mths 2 yrs 3 yrs
Main banks                
AA- 3.00 3.35 3.60 3.35 3.60 3.70 3.80
ASB AA- 3.00 3.20 3.60 3.20 3.50 3.65 3.80
AA- 3.00 3.30 3.60 3.25 3.50 3.75 3.50
Kiwibank A+ 3.00 3.10 3.20 3.35   3.40 3.60
Westpac AA- 3.15 3.20 3.10 3.40 3.20 3.70 3.50
Other banks                
BBB 2.95 3.40 3.50 3.50 3.65 3.75 3.85
Heartland Bank BBB 3.10 3.30 3.70 3.40 3.40 3.40 3.70
HSBC Premier AA- 2.55 2.90 2.90 2.90   2.90 2.95
ICBC A 3.05 3.35 3.65 3.45 3.65 3.75 3.85
RaboDirect A 2.85 3.50 3.35 3.40 3.40 3.45 3.80
RaboDirect BBB 2.75 3.55 3.60 3.60 3.70 3.80 4.00
A- 3.00 3.30 3.75 3.50 3.70 3.80 4.00
Selected fincos                
F&P Finance BB* 3.10 3.80 4.00 4.10 4.15 4.25 4.35
RaboDirect BBB 3.40 3.95 4.15 4.65 4.85 5.00 5.40
RaboDirect A- 3.00 3.35 3.60 3.60 3.65 3.50 3.50
  * = the only credit rating in this review that is not investment grade.  

Our unique term deposit calculator can help quantify what each offer will net you.

* True if you look over the past six months or so. But in the few trading days of 2017 these have been noticeably soft.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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23 Comments

In 87 i had no money invested as i was struggling to pay my mortgage with high interest rates.
Now 30 years later i have money invested and the returns are crap.
7.25% and i will be happy and not worried about not recieving the dole.

Don't complain you did well, how much is that house you bought in 87 worth now ? Now you have a house AND spare money, well done

Not really complaining,just a reflection on the amount of luck i have/haven't had.
''If it wasn't for bad luck i would have no luck at all''

Good work David thanks, but I was a bit surprised by the comment:" Such funds don't become useful for banks until they have a fixed duration of at least 1 year".

As I understand it, deposits with residual maturity less than or equal to one year, are not ignored:- they simply carry less weighting than deposits of 1 year which carry a 100% weighting for the purposes of calculating the Core Funding Ratio
In the RBNZ's Liquidity policy, the weighting to deposits of less than $5M is specified at 90%.
Only for deposits of greater than $50M does the statement seem applicable.
Of course, it is still true that a term deposit of more than 1 year is more useful to the bank than an on-call deposit.
I would be happy to be corrected.

Thanks DC. It's good to see savers are not a lost group.

As we have earlier noted, savers may wish to think through the wisdom of locking up of funds for longer terms in what seems to be a turning rate environment. This situation should have savers thinking through the risk/reward scenarios.

Indeed!!!!

Ironically, the introduction of technology allowed the exchange of ledger balances, transactions that needed no physical settlement, thus rendering clearing even more mechanical. But introducing widespread “ledger money” meant also a break in the limitations supplied by money as physical property. If money is solely property, the bank can never be anything more than a property agent providing a clearing and custodial service, a systemically minor task. However, breaking the physical limitation was the transformation that made the desires toward potentially unlimited finance possible – what was transformed was the balance between banks operating in finance and those operating as custodians.

Once money is transformed into something intangible, the bank is also transformed in both function and situation – the balance between finance and property custodian was obliterated, as banks became largely all the former at the expense of the latter. We saw exactly this process in the late 1960’s and early 1970’s, as eurodollars took on an increasing role in global trade settlement – and the only realistic means of settlement after 1971. But in the eurodollar market, ledger money is the sole and predicate resource foundation, meaning banks are not clearing via physical transactions, but rather extending credit and providing “risk transformations.” The bank moves from the background to the forefront. Read more

What forced MF Global into bankruptcy was not its brokerage unit, but its proprietary trading and balance sheet accounting. The modern bank, again as distinct in operation, seeks to both provide financial and property services to itself and others at the same time. The means for it to do so are the legalese openings provided by financial terms like risk. Banks have found over the past four decades a sudden and profound "need" to offset embedded risk through hedging, a perfectly legitimate activity in its own right. But where this grew dark was in crossing the line from serving customers and hedging risk created by that service to intentionally speculating through that window. Read more

For example, if a hypothetical bank's inventory included a mix of credit assets totaling about $10 billion, the bank would not hedge the entire carrying cost of that inventory. Instead, through its black box models, it will calculate expected "risks", and determine just how much hedging will cover the most likely risks. This is called dynamic hedging, or delta hedging. The models incorporate many factors, but the most important are correlation, delta, gamma and vega. If the combined calculations of these risk estimates determine that the anticipated potential change in the underlying prices is only $500 million, then the bank will only hedge for the $500 million (at most).

However, when does a hedge no longer become a hedge? Where does the line exist between hedging and speculation?

Hypothetically, there is nothing stopping a bank from applying, in the situation described above, $1 billion in hedges instead of $500 million. Again, the idea is to be cost effective, but what if that additional "hedge" position instead expresses an intent to profit off movements in the hedges themselves? If the bank "guessed" correctly, the "losses" in the $10 billion portfolio are not only recouped by the hedging positions, the bank would actually profit potentially to a greater degree.

There is an almost infinite range of possibilities in the ways that this relationship could be exploited. Not only can banks express a risky position (speculation) through their hedges, they can do so through the inventory itself, or in some combination of intertwined trading positions that, at the outset on the surface, look exactly like the vanilla hedge/inventory relationship. The bottom line here is that while securities are in inventory banks have an opportunity to make money for themselves given the environment.

That is not, itself, necessarily a bad outcome or process. But the potential for distortion in the intermediation process is not neutral. We already know this because this was the heart of the collapse in 2008. Read more

What unaccounted for risks are imposed upon ANZ's NZ depositors, given the under discussed function of a ~+ $one trillion Interest rate swap book - hedging or speculation or both, but in what proportion? View details -page 21 (22 of 80 PDF)

You really spoilt my day - reminding me of the existence of MF Global

Not a happy time for me

In a recent article in the NY Times Goldman Sachs are currently lobbying congress to allow them to use retail banking client deposits as collateral for their proprietary merchant trading

.the warning about locking in longer rates is valid.I did so in may 2016 and have gone for an early withdrawal,taking an early hit to be cashed up.

The tide was always going to turn ..... eventually., and maybe we will get some sense of normality with interest rates in the next few years

Savers have been punished for too long for being thrifty and careful , and its wrong on every level .

This is but a small step in the right direction

Here's one for the 90 at Nine tomorrow morning ...........Reuters has reported that at the close of business on Friday :-

"Oil prices fall on doubts over Opec production cut compliance"

It did not take long............... just 39 days since the agreement was signed on 30 November

Could they not wait for the ink to dry on the 30 November agreement before they started cheating on each other ?

It was almost inevitable that someone would start cheating and upset the apple-cart .

OPEC as a cartel is doomed because of a combination of greed , mistrust and self interest of its members , and this is all layered with the fact that the US is now a major producer itself , so OPEC does not hold sway as it did previously .

I was wrong , oil has recovered to the average price , and so its now unchanged as of this morning

I find banks I use, treat savers poorly, compared to people they lend to. When they drop the oncall savings rate, many banks I find don't even tell you. They don't have a newsletter that you can sign up to be informed of the drop, which would be basic to setup. yet they do often have this service for people they loan money to. I even asked a bank if they had such a notification system, and they said they didn't, but it was a good idea and they would look into it...crickets
So I rely on interest.co.nz to keep me up to date with the interest rate changes across the banks.

supplier vs customer.
in this case you are a supplier rather than a customer. but you are agreeing to supply (your money) to them based on their rules.

maybe some emphasis on return of your money and risk profile would be relevant,a bank with a BBB rating as opposed to one with AA are a world apart.finance companies range from A down to SFA but are still taking deposits and the returns offered dont reflect the huge gamble you could be taking.

The government should seriously consider giving a tax exemption for the first $10000 in interest earned on bank deposits, to boost savings and to recognise the hard efforts involved in saving by many.

What a good way to kill consumption..

The ills of unbridled consumption on which the western economies are mainly based are well known, aren't they ? Not to say that curbing consumption would be the idea of this move.
And why can't we expect the savers to spend some of the savings from such tax exemption ? Isn't reduced taxes a way of boosting consumption ?

We do have consider that, killing consumption (on the scale it is today), we cannot keep importing shiploads of landfill forever, that is for sure.

The government should most certainly seriously consider it, but that is not to say that they should actually do it. That consideration should include the following:

Savers are already rewarded for their efforts - their saving results in the fact that they now have savings. That is a private benefit, not a public benefit.

What is the public interest in encouraging people to enrich themselves when they already have every incentive to do so anyway?

What is the public interest in boosting private savings?

What would such an exemption cost in lost tax revenue, and how would that shortfall be addressed - higher taxation elsewhere, or less expenditure?

Savings by private individuals in banks do not serve the public interest ? News to me and to many economists, central bankers and banks themselves, I am sure. Not to mention Governments. Many countries co-opt the Bank deposits to some designated percentage (paying interest and ensuring capital adequacy) and use the funds for infrastructure, etc.

The government is already considering reduction of taxes, based on the surplus it has, right ? This could be one directed method of that.

Part of the interest you get from bank deposits is inflated away through government policy - so you get no benefit from it. However, the government taxes this loss, as part of the total interest gained. So the tax you are paying is effectively often over 50%. This is one reason why it is far more sensible in this country to invest in the effectively tax-exempt and tax-friendly property market.

So (in a rational world) the government should only tax the after-inflation component of the interest. This would be an alternative to what you are proposing, and might avoid some of the inequities and gaming that would occur through your proposal.

perhaps they should tax the capital gain on housing and incentivise people to invest in job creation businesses and activities which would benefit society as a whole.

Choosing to save in bank deposits (i admit to having several term deposits as part of my investment portfolio) is a personal choice, you could invest the same money in shares (some risk involved) and gain the same or higher return via dividends. both the saving interest and dividends are taxable of course.

Investing in businesses that make things or provide value added services is usually (not always) more beneficial to society than simply putting your money in a bank for them to lend out to speculators at a margin.