As we all know, when a Term Deposit (“TD”) matures, the customer has a period of time, the so-called “Grace Period” in which to decide if to rollover the funds or withdraw them. In my case the period is 14 days.
Since Adam and Eve’s days I recall that the “Grace Period” interest rate with my bank was always much lower than the interest rate on the deposit which matured. I last recall it being around 1% when TD rates were 4.5% or so.
Here’s my question: when I recently rolled over a TD I was given a choice of maturities, 3 months, 4 months etc. I was not given the choice of number of days until maturity. Just the number of months.
A TD matured on a Sunday and the next day I decided to pull the money out and move it to another bank as it offered a far better interest rate. I could not act on the Sunday, obviously as the bank was closed.
While I expected, for the one day post maturity, not to get the 4.1% the TD earned, I expected approx 1% would be what the bank would pay as was the case in the psat.
Lo and behold I received instead a whopping 13c for each $100k I had in the TD, a rate of 0.05%.
As I (and presumably others) are/were not given the chance to tie up a TD for a number of days which would mature on a weekday if we wanted, can a bank get away with paying almost zero percent over a weekend knowing my funds were held hostage until the bank opened on Monday?
Paying a “Grace Period” rate close to zero when there is a 2 in 7 chances of the funds maturing on a weekend smells like a sweet deal for the banks and is grossly unfair to customers.
When a TD matures and is in grace period, the interest rate will be that of the account the funds sit in. It is no longer a term deposit and the term deposit interest rates no longer apply. Generally monies from matured term deposits are everyday type accounts where the interest is low. This will be why you didn’t receive a higher interest rate as that which existed for the term deposit.
A way around this is to use a high interest bearing account. No need to worry about dealing with TD maturities, money is at call and there is no need to renew. However, look at the T&Cs of such accounts as they usually have conditions which need to be satisfied to meet the higher interest, such as no deposits or balance must increase by deposits month on month (with accrued interest is excluded as a deposit).
An example being Suncorp Growth Account which is currently paying a total of 5.05% interest (0.35% standard account interest + bonus of 4.7% when conditions are satisfied). Other institutions also offer accounts which are also worth looking at.
Good points you make. As I understand it, the bonus rate on such savings accounts can change at short notice with no notice given to customers. A major issue for me is the spread b/w the typical TD (as a surrogate for deposits) and typical mortgage (as a surrogate for loans). Last year I read a wonderful book that claimed the wider the spread the more profitable the bank. Apparently AU has the widest spread on planet earth.
Yes, Australian banks are very profitable for sure.
I am mystified why people put money into term deposits. You would struggle to get more interest than you could with a cash management account that has bonus interest, and your money is locked away for the term.
One reason is convenience and ‘set and forget’. Introductory rates require action every few months, bonus rates often have games to play, and if rates fall so do those rates. A TD ‘protects’ a rate for the term. Whatever one does is a punt unless one keeps their eyes on it all.
One thought is the best decisions are not always taken because financial literacy varies across the community.
And
To note one size may not fit all.
Unlikely banks are about to change?
For those with TD’s as for any major financial commitment - it’s important to look ahead of maturity and actively consider the options. No need to wait till after maturity to decide.
Interest rates go up and down on cash management accounts in step with other variable rates that are referenced to the RBA overnight cash rate. If that rate goes up, as it has over the last two years, then so too the rate on CMAs. The rate adjustment may lag by a month.
On the other hand, with term deposits, if rates are rising, you are locked into an interest rate that lags by the term remaining on your deposit. If rates are falling, then the banks price in lower rates on term deposits well before the prevailing rate compared to CMAs so you buy into a lower rate whilst the CMAs are still paying current rates. So unless the term of the deposit was at least a year, you would not see any benefit as the interest paid would have been lower from the start.
So which ever way interest rates are going, term deposits lose. And you also lose the at call of CMAs. The bonus interest conditions that are needed to be met to achieve good interest on CMAs are easy to handle if the conditions are simple. My Ubank account just needs to have $200 minimum deposited each month. That’s done with a set and forget automatic transfer.
Seems to me that having to manage the reinvestment of term deposits upon maturity on a continuing cycle is just not worth the hassle when they pay lower interest anyway.
But if you want to beat any interest paid on either CMAs or TDs, then own shares in the bank. And the most tax you will be liable for when the dividends are paid is 17% if you earn over the top tax rate. For most, the dividends are tax paid and no more to pay, and for those under the 19% tax rate you can actually get a tax refund for unused imputation credits.
But, to each his or her own with managing money. And that is just my view.
You make some good points. In fact while I still prefer locking in to a reasonable paying TD, your point on CMA, specifically with the likes of non Big 4 banks, you mention NAB owned Ubank (and I suppose CBA owned Bank West may be the same) is something I will check out. Of course the hassle is always the rigamarole to open an a/c with another bank.
It’s always worth looking at the options. The traditional CMA has many alternatives.
They can be, or like ANZ Plus one way to move customers on as part of the Digital Revolution.
Note it’s more than just a CMA. It’s a different way of banking. Possibly not even the same bank as existing ANZ customers CANNOT set up a ANZPlus product using their existing ANZ ID. The customer gives up branch access and a card option for an App installed on your mobile. What could possibly go wrong? A discussion for another topic knowing some are super aware about good passcode security and others use devices several years old possibly with updates turned off as of day one.
Not the first/only bank or banking product to go totally digital for service. Just pointing out why some choices are not as simple as their marketing suggests.
There are other options to a CMA which also offer bonus interest. It pays to shop around. The following noted per Suncorp appears to be typical of some other banks. Savings Accounts & Term Deposits | Suncorp Bank.
That may not always be the case. My partner wanted to open a new account. She’s been a customer of CommBank for more than 30 years, yet it was far easier to open that account with BankWest than with CommBank.
Interesting that ANZ and Suncorp mentioned in the one post. Because today ANZ has been given the go-ahead to take over Suncorp’s banking. Overriding the ACCC.
Ironic.
Some of the banks now use IDMatch which can be done quickly at home. It is relatively simple process if one has all ID required for the account application process.
BankWest is a different financial institution to CBA, and needs to satisfy it’s own ID verification processes. As a result, having a Commonwealth account wouldn’t make it any easier or streamline the process.
If you cannot get organised enough to manage the time element of investments then you may not get the best outcome for any type, failing to act when you ought is a problem for all not just TDs. Banks do contact you about the imminent maturity of such well in advance and issue reminders, it isn’t that hard.
That is somewhat arrogant. It may be fine for active investors to be able to manage their affairs when actions need to be taken, but many, and I am one, are not active investors.
I rely on competent managers to manage my Super, my unit trusts. Good company managers to run the companies I have shares in to deliver dividends.
It seems that with TDs, one is compelled to act on a regular basis to manage what happens to ones cash every time a maturity occurs. Consequences can be very low returns if the bank’s default action occurs. And there may be not much you can do once the money is locked in for another fixed term. At a crap rate.
I am not an active investor either, I don’t play the market or move money around often.
I don’t find it onerous to respond to reminders once a year or to occasionally look at the calendar where I note significant items that will need my attention in future.
Do you never verify that your agents are still doing a good job and that you cannot do better?
I do track the performance of all my investments on my home accounting, and if one of them looks dodgy I may investigate whether to change. But that is rare because they are all pretty good quality.
More concerned with paying attention to bills. Miss that car rego by a day, and that could be big trouble if pulled over. Miss that power bill, and the pay on time discount gone.
Miss that TD rollover advice to ones bank by a day, and goodbye good interest if the bank takes a reinvestment option in their favour not yours.
