The Red Bank leads term depost rates down into new uncharted, low territory leaving their 'replicating portfolio' clients with record low returns

A month ago we warned that term deposit rates had sunk to all-time lows - at least since 1966.

Well, now they have gone even lower.

Westpac is leading the way down, no doubt protecting their margins as borrowing rates fall too. Although to be clear, home loan rates have been pretty much unchanged for a few weeks now.

Westpac's 'leadership' has opened up quite a rate disadvantage for them on the term deposit front.

Their new six month rate is now -15 bps below any of their main rivals and -30 bps below RaboDirect and Heartland.

Westpac's new low one year rate is now only 3.55% (3.45% if you want monthly cash flow) and -25 bps below Kiwibank and BNZ. It is -30 bps below Heartland for one year.

For longer terms they are pitching their new rates low as well, far below their main rivals and the challenger banks.

They are relying on their 'replicating portfolio' - in other words lazy customers who just roll over, perhaps without noticing, perhaps feeling that there is just too much effort required to shift to another bank.

The difference between Westpac's 3.55% for one year and the 3.80% on offer from a number of other banks, if you had a term deposit of say $50,000, is $125 (less tax). At 3.80% you would earn $1,900 gross. At Westpac's 3.55% you would earn $1,775 gross.

At record low returns you would think savers would work even harder to retain any gain. Switching banks is undoubtedly worth $175 of your time. It's not hard at all.

Westpac is probably unconcerned. They earn their income when they lend. And they can source funds wholesale for much less than from retail term deposit (most of which are small from their perspective and therefore require considerable servicing expense). So long as they meet their core funding obligations, and they do, Westpac could probably care less whether you are attracted to their term deposit rate or not. They can live very well off that 'replicating portfolio' of long-term lazy clients. They won't be feeling any pressure to offer a competitive rate - and in their eyes, a 'competitive rate' will include their wholesale options.

Will term deposit rates keep going lower from here? Who knows, but probably. The next Reserve Bank OCR will undoubtedly cut 25 bps from that benchmark although that move is already priced in to wholesale markets.

Savers should be rooting for Janet Yellen to start raising US benchmark rates, but that too seems less likely than it did a few months ago.

So, what to do? There are options but almost all of them require you to take more risk on board. One that doesn't involves using term PIE accounts, but that only squeezes a small benefit out for you.

Or you could shift to using managed funds. In fact some KiwiSaver funds can be a good option. (When you reach 65, never close your KiwiSaver account because you cannot get back in again.) But any alternate is going to require some work by you to understand what the risks are and an assessment of whether that risk is worth the reward. There are more options than managed funds of course, and we will explore those in a separate article.

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 9:00am on Monday, August 31, 2015.

for a $25,000 deposit 6 mths 1 yr 18 mths 2 yrs 3 yrs 5 yrs
             
3.55 3.70 3.80 3.85 3.90 4.00
ASB 3.55 3.70 3.85 3.90 3.95 4.05
3.60 3.80 3.85 3.90 3.95 4.10
Kiwibank 3.60 3.80   3.85 4.00 4.40
Westpac 3.40 3.55 3.70 3.75 3.80 3.90
             
3.50 3.70 3.90 4.00 4.10  
Heartland Bank 3.70 3.85 3.95 4.00 4.10 4.25
HSBC Premier 3.30 3.40 3.60 3.75 3.80 3.90
RaboDirect 3.70 3.80 3.85 3.90 4.05 4.25
SBS Bank 3.60 3.80 3.85 3.90 4.00  
3.60 3.80 3.90 4.00 4.10 4.40
             
Gold Band Finance 2.50 4.50 5.25 6.15 6.25 6.50
F&P Finance 4.10 4.30 4.35 4.50 4.60 4.80
UDC 3.60 3.75 3.80 3.85 3.95 4.25

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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28 Comments

Might be best to invest money in residential property? The yields there are better than the yields on term deposits :)

No. Exchange it for another currency, just to stave off devaluation losses.

Yes, even keeping money in JPY in the past 8-9 months has probably been better than a term deposit.

Yes indeed! The majority of the damage has been inflicted since the end of April - graphic evidence. Expected future global financial dislocation scares will only exacerbate NZ's perilous situation, given that Japan's circumstances are not considered secure. Read more

Yes, but it requires knowledge, skill or luck to invest in property. If you're investing in property at high prices (in the case of Auckland), a period of economic uncertainty, and any doubt in the above, then you have to be able to build this into your risk assessment, whether that be subjectively or quantitatively.

Also, the idea that property is "just another investment class" is likely to a clear indicator that something is wrong. In reality, residential property should be like running a small business. How many small businesses go under? If you ask yourself that question and the answer is on the high side, I would then apply it to property and ask yourself how sustainable the market is under the assumption that being a landlord is like running a small business.

The ones I feel sorry for are the elderly - they're basically being forced to do what unfortunately many of them did (with less reason I have to say) back a few years ago when they invested with finance companies, invest into an over heated fundamentally unsound property market. And many with a lesser understanding of commercial property will probably do it in the retail market at even greater risk.

All part of a cuddly central banker's ideological tool kit - mainly, let them eat junk.

Moreover, private investors responded to lower yields on U.S. Treasury securities and agency-guaranteed mortgage-backed securities by seeking to acquire assets with higher yields--assets such as corporate bonds and other privately issued securities. Read more

Prices should be discovered in the market, not administered by a government. Read more

Of course let them eat junk, they're hardly the target demographic. Nor are they politicially or economically influential nor likely to become so. Any investment in sector or personal relations in the sector have little long term value and for some reason are frequently viewed with suspicion; behaving as if the target customer wasn't born yesterday....

Or put more money in to managed funds, but the sharemarket is looking decidedly peaky currently

But if the elderly are counting on some return on capital through term deposits with banks, are they not already exposed to the property market?

Yes, however the now elderly were once 30 somethings who reproduced, consumed and wasted at the rate they saw fit, the effects of that we see today in over-population, exhausted cheap minerals and climate change.

So just because they are now old and frail they are not responsible? Considering some war criminals were still being tried into their old age I dont see why responsibility should not be put where its due.

Yes Steven, some of us can be cynics, but I'm mindful that they're also the ones that carried on the creation of the infrastructure and culture in this country that we all enjoy today, or surely we would have moved elsewhere if we didn't. Many of them will have modestly provided for themselves, expecting perhaps that a 5-6% low risk return was possible, only to find that the world has turned on them when they least need it - yes I do feel sadness for them as I do currently a young FHB who despite those very low interest rates and in many cases solid savings, find thst they can't afford to buy a home. Its called emphathy

Name me an age group Steven who right now are not overconsuming, and exhausting the non renewables etc. I don't think you can.

True KH, the young I work with are big consumers and travellers etc - alot of talk by many across alot of age groups, other than Steven who doesn't do any damage to his environment, Truth is, humans have for hundreds of years improved their standards of living, and for Steven as well whether he wants it or not, at some expense to the environment - at least now it has a focus but always interesting to see those that are hypocrites throwing the stones

And God forbid that one day Steven should reach old age and having lived an absolutely exemplary life he will never be blamed by the young for the sins of his generation!

Have your own parents made the appropriate apologies to you yet?

Where's the thumbs-down button on this thing?

After 7 years of warning of higher interest rates (coming soon), bank economists have finally given up their constant predictions. Finally there is widespread acceptance that interests are low, lower, and lower for longer. This is the reality - interest rates have been low since 2009. There were one or two aborted attempts to raise rates - but unsuccessful. They will be low for the foreseeable future as well.

They usually sing "higher rates are coming" when they know there's nothing of the sort on the horizon, as it causes people to Fix when things are slow or slowing. It helps them get things locked in and that's cheaper money for the bank.

When things are going up, the guns go silent as they don't want people fixing, hoping instead that everyone will do up in the swell. Sure doesn't always happen because if there's a bank with some cheap long term money they'll lock that away quick.

If they start putting the float rates down you know that their incoming cash is getting cheap as they want to break the higher term supply commitments

With respect Cowboy, thats absolute populist cr*p and something I'd expect from another on here, not you - its extremely misguided and shows zero understanding about how a bank manages its funding and interest rates risks. It would be like me coming on here a spouting on about dirty dairying or the alike with no knowledge of the facts, but it might sound good to the equally misguided about daifry.

It's borne from watching the rates tables for 20 years and getting phone calls from the bank about fixing because of rate rises, two weeks before the rates ...drop.

And I'm referring to the media activity. The long term rates go up when uncertainty is in the wind, drop when cheaper (more supply is offered). I'm also particularly referring to when all NZ banks do so in unison, which is a sign the market moved/is about to move, rather than a push by one group or another.

It doesn't take a rocket scientist to figure out any bank economist, in fact any economist or market commentators in general, doesn't know with any great degree of confidence where rates are going, especailly fixed rates. The best guess as to where they're going is swap/fixed rates which are set by the global market with people putting their money where their mouths are - and yet we all know that swap rates, i.e. the market, get that wrong regularly as well.

So on the basis that no one knows, when a bank says time to fix, theyre effectively saying they agree with the market that its time to lock into swap/fixed rates which is locking in what the world thinks will happen - hardly a conspriracy of banks trying to stitch you up, rather theyre just expressing an opinion that the global markets agrees with anyway. They are simply trying to assist their customers manage risk (read, manage risk not trying to pick tops and bottoms which in my experience is what the majority try to do abysmally)

Term deposits and "high-interest" bearing cash accounts are still relatively attractive for non-residents because of tax benefits. I think the current tax rate for non-residents is 2%.

I guess you are referring to Approved issuer levy (AIL) - is it not restricted to registered securities?

Yes, I guess that's what they refer it it as. I think that it works to the advantage of for non-resident NZers who are risk averse and want to keep money in NZ.

DC, I do believe that I have a solution to the Awkland Housing Bubble.

Ship all a them FHB's off to Tokyo, and let them occupy the estimated 8 million vacant houses in the vicinity...http://www.nytimes.com/2015/08/24/world/a-sprawl-of-abandoned-homes-in-t...

Demographics is Destiny....the future belongs to those who show up for it.

Note, also, a delicious sting in the tail:

a perverse incentive ...has contributed to the problem. A tax break introduced decades ago to encourage home construction sets property tax rates on vacant lots at six times the level of those on built-up land. That means that if an owner demolishes a home, the tax rate soars — a big reason many let even crumbling houses stand.

So... they want to take the money out of the bank and put it somewhere else ... into property (so they can make more money).
That means that that person would need to take a mortgage which means the bank will not own any money to the person (as they do not have it anyhow !) but the person will own the money to the bank....

So when everything will collapse - banks will be just collecting the money ...

and in some cases of behalf of close friends it seems reported

The single mother had banked with Westpac since for about 13 years: "every loan, all my accounts, every car loan, my mortgage".

Read more: http://www.smh.com.au/business/comment-and-analysis/single-mum-learns-lo...
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