Canstar’s 2019 Term Deposit Award reveals some of the most impressive term deposit providers available on the market today. Finance News - June 14th Term Deposit Rates Slide Further But Can Savers Still Find Value? John has $100,000 to invest and decides to take a 3-year term deposit, offering a rate of 3.70% per annum as this is better than the 3.40% on offer for a 12 month term deposit. The approximate income over the first 12 months would be as follows. Kiwibank term deposits: What’s happening in the market In 2017, Canstar rated 9 term deposits from 9 different providers, looking at the rates they offer, as well as various features, such as early withdrawal, statement options and discounts and bonuses. When it comes to Finance News - February 15th.

Co-author: Michelle Norton

If you invest in term deposits, chances are you may have just one or two large amounts of money in just one or two deposits. Sometimes, you may not get the best interest rate because you’re not willing to lock the money away for too long – whatever that means for you.

The solution to this problem may be a ladder investment strategy instead. Term deposit laddering allows you to have access to your money at regular intervals, but take advantage of the higher interest rates available for longer term deposits.

How does term deposit laddering work?

Instead of putting larger chunks of money into one term deposit, with term deposit laddering you break the money into bundles and put it into longer term investments one at a time. If, for example, that’s five chunks over five years, you’d invest the first chunk for five years and gradually roll the others in every year. In the meantime, put the remaining money into shorter term investments until you’re ready to roll them into the ladder. Once all the money is invested, you’ll have equal portions coming up for renewal regularly.

It’s a bit like singing a harmony in rounds; someone is always starting whilst another is finishing.

What are the advantages of a ladder investment strategy?

• Interest rates may be better for longer periods of time, boosting your returns.
• It’s a structured way to invest.
• This gives you more flexibility than keeping all your investments in one or two large, but shorter terms.
• With chunks of money coming up for renewal regularly, you have an increased chance of capturing better rates as they arise.
• You have longer term guarantees as to how much you’d earn on your money than if you had shorter periods. If you’re living off the income from term deposits that certainty can be reassuring.
• When each rung of the ladder is reached and the money released you can choose to go elsewhere.

The main disadvantage of a ladder investment strategy is that you’re locked in for a longer time, which won’t help if you need all of your money unexpectedly.And the disadvantages of term deposit laddering?

• If you choose long term deposits you could be stuck in a poor rate for a long time. Whilst 4.50% might look like a decent term deposit interest rate today, who knows if it will be in five years’ time. It’s unlikely, but if banks were offering 7% in two years’ time you’d be annoyed about being tied in for five years.
• Term deposit laddering involves more paperwork than putting all your money into one or two term deposits or a notice saver account.

Help: A ladder investment strategy isn’t enough, how do I budget?

If staggering your term deposit isn’t enough to help out with managing your savings, it might be helpful to take a step back and look at how you can budget to make some savings. That way, locking some money away won’t become such a stressful situation and you can enjoy looking forward to those returns!

6 ways to cut your weekly spending:

Whatever strategy you decide on, ensure that you are getting a comparatively good return. You can read Canstar’s latest Term Deposit Award report and compare term deposit rates here.

Best Term Deposits

Six months or two years? One year or five years? Choosing the correct tenure to get your best term deposit rates in New Zealand can be quite the minefield.

The choice of tenure of your term deposit can make a huge impact on whether you are really getting a high interest term deposit. While it can be tempting to simply look for the best term deposit rates on offer, this is not the only factor.

Aside from looking for a high interest term deposit, also consider:

When do you need the money?

Once you invest in a term deposit, the money is there for the entire length of time selected. It might be easy to overlook this if you see dollar signs with a high interest term deposit, but you could get caught out if you need the money before the term is up. It’s important to be realistic about how long you can practically lock your money away.

What are the withdrawal penalties?

If you do need to access your money early, be aware that early withdrawal penalties apply on term deposits – and they can be steep! According to the Banking Ombudsman Scheme, if providers agree to break the term deposit, it will most likely reduce the rate of that high interest term deposit that you gleefully signed up to. The provider might also seek to recover interest that was paid at the higher rate during the term of the deposit. The reduction in interest may depend on the amount you put into the account, the current interest rates, and the length of the term.

Is the security of the institution acceptable?

Canstar Term Deposits In Accounting

Investors should make themselves familiar with the credit rating of their selected institution and ensure that they are comfortable with that rating.

The hunt for the best term deposit rates in New Zealand

While we can’t provide you with a magic formula for finding the best term deposit rate in the country at any given time, we can certainly make the process easier by giving you a good range of providers’ rates to compare. It’s also important to keep in mind how changes to the Official Cash Rate can impact on term deposit interest rates.

Banks set their term deposit rates around what they expect to happen in the wider economy and may sometimes pay a small premium for longer-termed deposits. While none of us have a crystal ball, it’s important to be aware that interest rate movements during the term of your investment will affect your return either for better or worse.

At the time of writing, the Reserve Bank of Australia had just ruled to lower the OCR to a record low 1.5%. In an interesting move from Australian banks, the larger banks swiftly moved to pass on some of that rate cut to borrowers, while increasing term deposit rates.

The Reserve Bank of New Zealand is due to review its cash rate on 10 August and economists are predicting it will reduce the rate from its current 2.25%. Should this happen, it will be interesting to see whether New Zealand follows in Australia’s footsteps and passes on some of this rate to savers using term deposits. This move could give New Zealanders a greater chance of finding a high interest term deposit.

It should be noted, though, that when interest rates are low, the effect of a rate change will not be overly significant unless you are investing a substantial amount of money.

Term Deposit Example

Fixed Term Deposit Rates

John has $100,000 to invest and decides to take a 3-year term deposit, offering a rate of 3.70% per annum as this is better than the 3.40% on offer for a 12 month term deposit. The approximate income over the first 12 months would be as follows:

After one year, John has earned an additional $300 on his funds by choosing the higher interest rate of the three year term deposit.

But what if rates increase?

Canstar Term Deposits Government

Let’s assume that at the end of the first year, the official cash rate is on the rise and the 12 month term deposit rates on offer have increased from 3.40% to 4%. John’s income in year two would look as follows:

At the end of the second year, John would have earned the same amount on his funds whether he chose a 3 year fixed rate or two 12 month fixed rates, as the higher income earned on the 3 year term deposit in year one was cancelled out by the higher interest earned on the 12 month term deposit in year two.

Whether John would earn more from fixing for three years or more for fixing for 12 months would therefore come down to the interest rates on offer at the two year mark.

The bottom line with choosing a term deposit length:

It’s impossible to get the tenure right every time and even the best economists can’t predict the future. Being realistic, though, about your need to access the money in the future and the likely economic trends will help you balance getting a high interest term deposit, with your other needs – such as access to your funds.