The combination of boomer demographics and a weakening economy is depressing term deposit rates. Thus David Chaston says the prospect is for lower rates in the future

By David Chaston

The main banks are not competing hard for retail funding. They don't need to.

And the risks are that term deposit rates will flat-line from here or even decline. Rises are unlikely for some considerable time.

Household bank deposits are growing at about +$11 billion per year and have done so at this rate for the past five years. That is a large, reliable addition to bank funding. And given that bank loans to households are growing at the same +$11 billion per year rate, the pressure is off banks to compete hard for funds - they are coming in just fine at current low interest rate offers.

In fact, 4% offers for terms most depositors will accept (three years or shorter) have almost completely disappeared. Only SBS Bank offers a 4% rate in this term range.

But most depositors prefer much shorter terms. RBNZ data shows we have a remarkable 34% of our money at terms with banks due in three months, we have 31% due in about six months, 23% due in about one year, 5.5% due in 18 months, just 2.8% due in two years and just 1.9% due in three years. The great weight - 88% in fact - is due within one year. That is short (and especially short when you think that we want banks to lend long - 30 years for mortgages, five years for personal loans).

We are very long-term borrowers, but very short-term 'investors'.

Heartland Bank (credit rating BBB) consistently offers the highest term deposit offer rates for terms up to one year.

Chinese bank ICBC (rated A) consistently offers the highest rates for terms longer than one year.

The rate sweet spot seems to be offers for terms in the range from eight to nine months to 18 months.

Interestingly, overall the main banks seem to be as competitive as the challenger banks - each group are offering an average of 3.47% in that range. Among the majors, ANZ (3.50%) and ASB (3.52%) are the leaders, while Kiwibank is the laggard (3.40%).

Generally the challengers are higher but the group is dragged down overall by TSB, which averages just 3.32% in that range.

These are low pre-tax rates and sadly the recent trend is soft - they have been dipping lower recently as the graph below shows.

And the prospects for higher rates aren't too bright either. The RBNZ says it is equally balanced in setting its Official Cash Rate lower as likely as higher.

How low could they go? Well, we are still +20 basis points above rates we had two years ago and rates could easily slip back to that level.

At its core is the fast-growing over 65 demographic that is cash-rich, especially if they down-size their housing, and risk averse. The boomer impact.

And loan demand, a key driver for bank rate competition, isn't strong either. And it may not move up anytime soon with business confidence sinking post-election and staying down. There has been a bit of a boost recently in housing sales (in May), but that is not expected to flow on further and housing activity will be low at least through October. Housing loan demand is the biggie for banks and growth is pretty much falling away (+5.9% now and down from +8.4% a year ago). Business (+5.3%) and rural (+2.5%) loan demand are each pretty tame and also falling away and are unlikely to pick up any time soon.

For higher rates, you will need to assess the offers of institutions with a lower credit rating. Rate offers rise significantly from non-bank institutions with sub-investment grade ("junk") credit ratings.

PIE rates can give a small boost to pre-tax return equivalents.

Using 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 financial institutions for terms of less than one year are here, and for terms of one-to-five years are here.

Term PIE rates are here.

The latest headline rate offers are in this table. 

for a $25,000 deposit Rating 3/4 mths 5/6/7 mths 8/9 mths 1 yr 18 mths 2 yrs 3 yrs
Main banks                
AA- 3.00 3.25 3.45 3.50 3.55 3.65 3.80
ASB AA- 3.00 3.25 3.45 3.50 3.60 3.70 3.80
AA- 2.90 3.25 3.45 3.50 3.60 3.65 3.75
Kiwibank A 3.00 3.25 3.35 3.45   3.70 3.85
Westpac AA- 3.00 3.25 3.35 3.45 3.55 3.65 3.80
Other banks                
BBB 2.95 3.25 3.35 3.45 3.60 3.70 3.85
Heartland Bank BBB 3.10 3.45 3.60 3.60 3.70 3.80 3.85
HSBC Premier AA- 2.50 2.80 2.80 2.90   2.90 3.00
ICBC A 2.95 3.25 3.55 3.35 3.75 3.85 3.95
RaboDirect A 2.80 3.30 3.30 3.35 3.65 3.80 3.90
RaboDirect BBB 3.00 3.30 3.40 3.45 3.65 3.85 4.00
A- 3.00 3.15 3.20 3.25 3.50 3.65 3.90
Selected fincos                
B*       4.30 5.00 5.30 5.50
Liberty Finance BBB- 3.60 3.95 4.25 4.30 4.35 4.40 4.45
UDC BBB 3.00 3.50 3.65 3.70 3.65 3.85 3.85
  * = these credit ratings in this review that are not investment grade.  

Rates in this table are the highest offered by each institution for the terms listed. You however will need to check how often interest is credited or paid. That important factor is not filtered in the above table and rates with various interest payment/credit arrangements are mixed here. However, our full tables do disclose the offer basis.

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

Term deposit rates

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40 Comments

How many of the short duration term deposits are FHBs saving for a house?

I imagine that many (prospective) FHBs are using KiwiSaver and managed funds these days.

TTP

I think your right, a substantial number would be boosting their Kiwisaver contributions probably going into growth funds to maximize returns. This could have an interesting impact on the housing market in a recession/bear market as potential first home buyers could see the deposit shrink considerably and actually reduce their chances of buying in a market dip, especially at bank risk appetite would be low.

Not really kiwisaver complicates matters and is far more restrictive to FHB than any other managed fund. For instance the deposit is not available ready for the purchase and cannot be withdrawn until after, there are price restrictions, there are prior engagement restrictions, there are restrictions due to how many months in the year someone has contributed and if you are looking at building kiwisavers restrictions make it a complete bollocks nightmare. Had family who thought KS was ok to store house savings in until they had to fight to get access to their funds for a home, they even met most of KS conditions but it still was not available for them as a deposit to be used. It was far easier to get a mortgage with cash outside KS then even applying to withdraw and use the cash in KS as a deposit. Only a moron would think they could not get similar returns from any other managed fund and see they would have far more freedom outside KS. Especially for those looking for housing at today's prices, with needs for more variable distribution between both stable & risky investments. Even I would not go near KS with money saving for a first or initial home. Might as well sign up to line the fund managers pockets instead of providing actual value.

You may wish to read up more on Kiwsaver.

You appear to be confusing the FHB withdrawal (taking our your own + employer contributions) with the FHB subsidy (where the Govt gives more money)

There are no income, tenure, price restrictions on the former.

The benefit of KS is the employer and govt contributions. As always, that should only be part of a savings strategy, not all of it.

As a side - on the matter of distribution between 'stable' and 'risky' assets, only go to a KS provider that allows you to split your contributions and portfolio in a customized way.

managed funds and short term ? Risky business. Min 5 years at least especially after a bull market

"The combination of boomer demographics and a weakening economy is depressing term deposit rates."
Wot; not all is fine for those boomers aka born with a silver spoon in their mouths, leech-sucking parasites.
Whoa! Surely not boomers continuing to be hit by low term deposit interest rates subsiding Generation X, Y, Z low mortgage rates.
Not being able to slag off at the boomers. Horrors of horrors; Generations X, Y, and Z may have to show some positiveness towards the boomers.

…..…………………………………...

I dont think banks give a toss about the term deposit rates they offer customers.
It's a captive market.
Can't exactley bang the cash under the materess these days.

They do insofar that the banks prefer NZ deposits for onlending at a margin

Read all the articles and commenters on here wishing for lower home loan rates... two sides of the same coin and cannot have low HL rates without low TD rates.

Imagine how the returns of TDs are getting eroded by every exide, petrol tax and every insurance, water, power and Rate bill savers receive especially when the money is invested / locked in over medium or long terms.

These are the core expenses which directly affects everyone's budget .

The combination of just these main, everyday and must have outgoings, exceed CPI percentage.

TD at such low rates is a devaluation of the saving overtime ...the return is measured by the value of the entire capital not % numbers.

Eco Bird, on top of the expenses mentioned, have you figured out a way to avoid exposure to considerable interest charges, ever increasing maintenance costs, wages of various "business partners", insurance and rates on a long term flatlining/declining asset? This is now the future for speculandlords who can't save cash to save themselves. I'll leave you and your "business partners" to help you figure it out ;-)

There is a simple answer to low interest rates, and it is investment in equities. The yield gap (difference between deposit rates and dividend yields) is as wide as ever and there is no sign of it reducing.
To have a proportion of your investments in equities, and well diversified, is the answer to low returns on your capital. The average gross dividend yield across the NZ Top 50 Share Index is >6%pa. It really is a no-brainer.

Agree, dont stop there though. Even better to have a healthy combination of shares, precious metals, "debt", P2P investments, foreign earnings, and realestate with rental revenue. Practically the only thing you don't want to have is cash - or so it seems.

The last 30 years of history has shown that debt is awesome. debt protects your future earnings. Is it not possible that rates will only ever go down. There is no zero lower bound!. No matter how low interest rates are they can always be halved and that will halve the debt servicing cost. Perhaps in 10 years time banks in NZ will be offering mortgage rates of 0.5% and term deposit rates of 0.03%

fat pat,

Currently, i have 61% of my total portfolio in dividend paying shares,20% in rental property,14% in cash,2% in P2P and 3% in bonds.

I have gradually been increasing my cash over the past 2 years as the market has risen beyond what I consider to be fair value. The cash is mostly in short-term PIE TDs. Bring on the major correction.

nice - I have 83.8% property, 4.7% NZ shares, 10.1% PM, and 0.5% cash, with foreign earnings in euros. With a debt to equity ratio of 1:110. Not really happy about the debt. I should have more at my age.

Interesting. No debt. 20% commercial rental. TD. 20% (temporary) 30% managed funds both balanced and aggressive. 40% two residential and rural land. Not income producing. But I only need one residential.

If they let the market set interest rates, I suspect they would be lower.

David, I believe NZ banks are funding less than 25% from offshore to provide for loans in NZ, can you please confirm this? I think the dependancy (or not) to borrow overseas is paramount to predict the future of interest rates in NZ as US rates are rising. Thanks in advance

I haven't read this completely but it looks handy;
https://www.rbnz.govt.nz/-/media/ReserveBank/Files/Publications/Analytic...

Thanks ZP, it doesn't quite answer my question but it's interesting reading all the same. Nice Sunday morning (I'm in Spain) read lol, especially the wicked formula !

see detailed answer below. It's 16.6%.

Many thanks DC : )

I'd say the Boomers accumulation of deposits in shorter terms has more to do with wariness with being caught up in an OBR event. A lot of funds could be hotter than many think and shift quickly to perceived lesser risk. I would imagine that many view the current OBR backstop as a self fulfilling prophecy in itself. Nobody wants a haircut.

If the time comes when we have deposit insurance, I would expect this cost would be passed onto depositors by way of even lower rates on offer.

An alternative view is that Boomers have lived though some periods of high interest rates and don’t want to lock in what they consider life time low rates. The premiums offered for longer terms don’t encourage it either e.g. 30 basis points to go three years over a one year term. I remain convinced that term deposits are a parking place for money in between productive usage. I’m antsy with mine, I just can’t see the opportunity right now to invest it as assets are fully valued and the regulatory risk is off the chart with the COCM.

Rex Pat, this would have to be on the collective view that rates are about to rise. They are dropping and have done for some time now.

i doubt baby boomers have heard of OBR let alone what it would do or means.
i think its more they way they were brought up, ie save by putting in the bank, buy some bonus bonds, dont invest in the share market thats too risky, buy a rental property if you can, what the hell are bonds.

I depend on interest from term deposits to pay my rates,insurances,car rego,power bill,fuel bill and on a good month allows me to have a dabble at the TAB.
My income has fallen dramatically over the last 4 years but have managed to keep bills to a minimum.
I can't wait until term deposit rates climb higher.I would be happy with 7.25% for 5 years.
Could be waiting for sometime or maybe the Govt might see fit to pay me the unemployment benefit for working and saving hard when young.
Thank goodness my other half works.

DC's graph above shows 3.4% for a one year term TD seems to be the indicator. Then in his article this morning three banks are offering mortgages (one year) at 4.19% That gives a margin to the bank of about 0.8%. That doesn't seem a huge margin to me, even with my confirmed anti bank bias.

Looking at the bank rates, for longer term savings - perhaps beyond a few years - why wouldn't you put money into one of the low-cost index trackers, like Simplicity? Simply spread the money across the different volatility profiles dependent on your timing and needs?

https://www.rbnz.govt.nz/statistics/s40-banks-liabilities-deposits-by-se... 331 billion
https://www.rbnz.govt.nz/statistics/s30-banks-assets-loans-by-sector 437 billion
Anybody know where to find what banks owe collectively to overseas lenders?

Yes. I think you add RBNZ S40, element B1 = deposits owned to offshore financials = $9.2 bln

plus

RBNZ L3 Offshore Market Funding = $72.2 bln (you will need to download the spreadsheet)

equals total of NZ$81.4 bln.

This is the offshore funding component of total NZ bank liabilities of NZ$491.2 bln.

So the offshore funding exposure is 16.6% of all bank liabilities to depositors, and other wholesale funders (both local and offshore). As a percent of GDP, that offshore funding is 29.5% of one year's GDP. 

The main advantage of offshore funding is that it is long term. Local depositors won't lend longer than about 1 year, whereas offshore funding can stretch out 5, 7 even 10 years and is a helpful match for local borrowers who want to borrow up to 30 years.

Thanks a lot DC. From your last sentence, would you conclude that short term interest rates in NZ are less likely to rise than longer term rates?

This is indubitably the most fascinating analysis David. Article of the year!

So if there wasn't the political imperative that boomers need to get at least a 3% risk-free return for the 175b
that they are hoarding until death. The NZ banks could get all the money they require from offshore at far lower rates and for much longer terms. Then the borrowing classes could get 10,20 or 30 year fixed rate mortgages at far lower rates than they are paying now for what other countries consider ARM's.

That is one of the most uninformed comments I've read. Suggest you educate yourself on the risks of borrowing offshore and the availability and cost of term money in NZD.

Well, what would I know? Probably nothing. But a bit more since your encouragement to educate myself. Doesn't the NZ Reserve Bank impose a core funding ratio on NZ banks which effectively limits what they can borrow offshore and forces them to compete (with higher interest rates) for the pool of available depositor funds in New Zealand? These interest rates are passed on to borrowers. NZ Banks can borrow in Euros at rates of around 1 %. They still need to hedge the exchange rate risk with FX swaps so this adds extra costs. But when you can loan out at 4.5% fixed for 2 years the margin is pretty good. Well, it would seem to be. Compared with the margin they are getting on the local deposits that they are paying out interest of 3% on.

The Reserve Bank wants to maintain the stability of the banking system. Having banks fund themselves in markets where liquidity can quickly dry up is not smart so they require banks to source a significant portion of funding in the local market. As for margins, the bankers goal is to capture a margin with the least mismatch risk I.e. lend 2 years and fund through swapping short term rates into long term rates. I suspect there is no depth in the longer terms and Kiwis are cheap so wouldn’t pay the premium anyway. In short there is no boomer conspiracy. The RBNZ wants stability and banks want to fund and lend with miminal interest rate risk.

I am looking at changing mine to balance funds as I believe the risk is on upside.
Your thoughts - which funds are better in the short to medium term?

https://milfordasset.com/funds-performance/view-performance