If you need to end a term deposit before its term is up, you might be up for a sizeable break fee. Or not. It depends on your banker, it seems

If you need to end a term deposit before its term is up, you might be up for a sizeable break fee. Or not. It depends on your banker, it seems

The relentless drive lower of wholesale interest rates is taking its toll on term deposit savers.

And low rates put the squeeze on bank 'net interest margins'.

Savers are getting the short end of these pressures.

One of the pressures can come from the imposition of 'break fees'.

'Break fees' you ask? Aren't they just for when you break a fixed term home loan contract?

No, actually. They can also apply to breaking a fixed term, term deposit.

But why would a bank impose a break fee when the rolled-over rate will be lower?

Well, actually, savers don't break term deposits to reinvest them. The need to break them is for other reasons.

To be fair to all banks, we have not heard of all of them imposing these fees.

A reader has sent us some interesting detail of a set of transactions involving three banks.

1)      RaboDirect, $120,000 on a 5 year term, interest paid monthly, rate = 5.03% p.a.

2)      ANZ,  $120,000 on a 5 year term, interest paid monthly, rate = 5.00% p.a.

3)      BNZ, $120,000 on a 5 year term, interest paid monthly, rate = 5.00% p.a.

"Due to an unpredicted change in circumstance we are trying to break these term deposits to buy property," he writes.

The break terms between these banks were all different, one significantly, as follows:

1)      RaboDirect: same day break, no reduction in principal, slight reduction in final monthly interest payment.

2)      ANZ: 31 Day notice required to break. Notice given 11th April for a 5 May Break. No reduction in principal but a small reduction in final months interest payment.

3)      BNZ: 31 Day notice given at branch on 11th April. "No notification at day of notification re significant break costs. Receive a call from branch 12th April that the break costs would be $10,397.29."

In this case, BNZ has moved to recover all interest paid at the contracted rate and applied the rate that would have been offered for the actual term. Deep inside their Standard Terms & Conditions (page 25) is the contracted basis for this.

However, they face others who apply a much more forgiving attitude. In this reader's case the only adjustment ANZ or RaboDirect imposed was for the rate in the final month. The saver kept all the higher rate for the earlier term, even though each has standard conditions allowing the same as the way BNZ applied.

Bank officers clearly have discretion to waive break fees but this varies between banks. Unfortunately you can't reliably research this in advance. You may find a bank official imposing the Standard terms, while others may take a more flexible approach.

Another issue this case raises is the Bank's ability to change the T&C's at their discretion. In this specific case, the T&C's that were in place when this term deposit was taken out did not impose the break-fee ability. That was added is a subsequent set of T&Cs imposed by the bank later. But the early BNZ T&Cs did give them the right to alter them after giving a "public notice". (S.4 in the 2012 T&Cs.) Maybe this is understandable given that the law changed in the intervening time imposing the 31 day notice requirement as part of the AML regulations.

We are interested in readers' experience about this. Have you had a similar experience? Who with?

It is only through revealing a series of actual experiences with each institution will others get to know how each bank deals with early breaks on term deposits.

You can either email me directly (david.chaston@interest.co.nz) or use the Comment facility below.

Term deposit rates

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24 Comments

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A bit off subject but I recently wanted to add to a term deposit that I had with Heartland.I had a couple of collects from the TAB so when the term deposit was up for renewal I headed to the bank with my cash,but what do you know.THE BANK DOESN'T TAKE CASH.

WTF! I hope you gave them a mouthful instead then? What was their logic/excuse?

I am not sure if she gave an excuse but she attempted to give me a deposit form for Westpac across the road which I presume then transfer the money back to Heartland.Ithen asked her if they took cheques,to which she replied yes. I then told her I would come back with a cheque and promptly left and deposited the money at a better interest rate at my Credit UnionI

I still don't get it. In the BNZ example you might imagine the bank trying to get out of the arrangement and contacting you and offering an incentive to do so. (yes DC. I did read the bit about the buried bit in the contract)
My experience (For loans not deposits). I had Westpac at rollover pre-specifying a break penalty actually far in excess of the interest that would have been paid during the term. Astonishing. They just slipped that quietly into an email. I didn't fall for it and subsequently am floating. As others come due it will be the same.
The contracts hooks are getting to the stage of dodgy.

Inconsistency is rife and a problem internally as well as with competitors but at the end of the day why would you not expect to be penalised for failing to honour a contract You wouldn't get away with that many places so why expect your bank to be that generous. Ex banker.

Willstar you do show yourself to be a banker mentality. I would not expect to be penalised for the following reason. By breaking the term deposit at 5% interest rate I am saving the bank money. Because the current interest rates they are paying are much less. You know all this. It might even be worth it to them to offer an incentive.
But no. Banker thinking if that they sneak it into the contract they can extract more cash. It's banker thinking true, but it ain't right.
I don't expect you can even follow the argument.

Willstar. Yeah, I guess the hint that people forget is that it is a "term" deposit. A deposit held for a term.

I have just broken my term deposit last week for the exact same thing with ANZ. I needed the money for a deposit and guess what, they reduced the entire interest, even the one already paid. 20K at 1 year on 4%, interest paid quarterly. I have been paid interest for the 3 quarters but had to break to meet my settlement date. So I was expecting for the final quarter to be at the reduced rate and the principal in tact. Lo and behold, the principal was missing over 500$. Explanation given was that the total interest was reduced from 4% to 1% including the ones already paid.

Had a similar situation with the BNZ with my mothers estate. Several term deposits with various lengths left to run. I believe the interest rate would be varied to the rate applicable at the time the term deposit was taken out and the BNZ would forgo the 2% penalty fee on compassionate grounds. The interest rates were good @4.75% to 5.6% , we didn't need the money , so we've kept the term deposits.

Yes excellent idea. Those rates will not be applicable again for many years so it makes sense to leave them in there if you can and take it all out when they mature.

I did ask my sister to see if they could be changed to compounding.

BNZ seems way behind the times. I went into a branch recently and told the teller i wanted to deposit some money into a BNZ account and showed her the name and number. NO you have to fill out a deposit slip she said , pointing to the forms over by the wall. I have done this at ANZ, Kiwibank, and Co-Op bank. None needed a deposit slip. No other customers were in the BNZ the whole time I was in there

Some tellers help by pulling out a deposit slip and half filling it out themselves. Maybe the teller you got was a grumpy old thing!

Yes she was certainly unhelpful but why the deposit slips at all? the other banks didn't need them. They give you a printed receipt for the transaction.

What I find an absolute con is when these banks advertise their TD rates as 'per annum' but the deal may only be a 3 month or 6 month deal. Thus the percentage figure they advertise is not the actual percentage paid by a long shot for that period. It's misleading

I also don't like how THEY can change a PIE rate when ever they feel like it even though when signing up you BOTH contractually agree to a set rate....effectively. Id like to see their faces if people tried that on a mortgage contract eh! "ohhh, just to inform you that your interest rate on our mortgage is now lowering to 2.5%. We still feel this is a competitive rate.......considering you pulled your share of the loan from cyber space's ass"

Just heard from a friend that they lost out big time with Kiwi bank by breaking a term deposit for a necessary business matter. Yes a notice account. My overseas bank says it is a non redeemable deposit. At least this tells you where you are.
I can't think of many reasons why people here should lend our banks money as the terms are so poor and there are no guarantees. If Warren Buffet was a customer I don't think they would get his business.
I wonder how much money has flown overseas to most other countries where the money is safe. Our banks should at least be required to provide detailed advice to investors explaining the financial penalties incurred by early withdrawal.

One option: retire and use it all up. Assets can be liabilities.

Most Banks have shareholders to pay. That's the sole reason for thier existence.They are not a public service, despite their picture perfect TV Ads.

I had a notice account with Kiwibank and they went out of their way to break immediately and I just lost a part portion of interest for that month.

"Required to provide detailed advice to investors explaining the financial penalties" Errr, they do. I have done a few TD's over the years with different banks and it's been called an Investment Statement and now a Term Sheet over the years and it outlines the details of the arrangement. There will also be a cooling off period if you don't like it, where you can have your money back.

Looked into breaking a term deposit work had with the ASB at 4.8% to buy commercial property. Bank manager said don't bother, just borrow against the term deposit - he should be able to offer a rate of less than 4.8% secured by the term deposit the bank itself holds. On maturity the term deposit would repay the loan. Therefore no break fee and no waiting 31 days, just minimal legal cost allowing the bank to offset the loan with the maturing term deposit.

hahaha so you are saying that if I don't like the 3.25% interest rates the banks now offer for 9 months then i should sign up for a 5 year term for 5% and break it after 9 months and expect the banks to pay me 5%???? where on earth are you coming from?? the only way banks will pay 5% now is that they know rates will be way over that in 5 years time and they are averaging.... and you are taking their profit if you want to break your TD early while the rates are low and they are paying you high. I am surprised they all do not charge hefty penalties and that you can't see this.

I'd certainly be interested in anyone was offering 5% for 5 years - sadly no one is...