Term Deposit Award We endeavour to include the majority of product providers in the market and to compare the product features most relevant to consumers in our ratings. This is not always possible and it may be that not every product in the market is included in. 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. Term deposits 101 starts with understanding what a term deposit is and how it works when it comes to saving. Read more about term deposits at Canstar. Deciding which term deposit is the right one to commit to will depend upon a variety of factors, determined by individual circumstances. Term deposit interest rates are determined by both the amount invested and the length of time for which it is invested, providing investors greater incentive to invest more and over longer periods of time.

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?

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

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:

Canstar Term Deposits In Excess

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 In Accounting

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.

So you want to find the best way to maximise your money, who can blame you? A term deposit is a popular option to keep savings out of reach and to boost those dollars in the process. And, according to Canstar’s latest research, locking away the savings for longer than a year can often mean greater returns.

In the case of five-year term deposits, in 2017 you can get a maximum rate of 4.20% (up from 4.05% in 2016), according to Canstar’s database. This compares with a maximum rate of 2.85% for a three-month term deposit (down from 2.95% in 2016). When you compare maximum rates for the two different tenures, there’s a 1.35% difference, or 135 basis points. But before you are blinded by the dollar signs appearing in your eyes, it’s important to look at what having a term deposit entails. and whether you’re in a position to lock away your money at all.

Comparing three-month term deposits with five-year term deposits:

Three-month term deposits

Five-year term deposits:

Term Deposit Rates New Zealand: How does the length affect your finances?

Once you have invested money in a term deposit, it’s in there for the entire length of the term selected – anything from three months to five years. Minimum, maximum and average rates have decreased for all nine of the three-month and six-month term deposits rated, according to Canstar’s research. In the case of one-year term deposits, the maximum rate has increased by 0.15%, but the minimum and average rates have decreased. The news is more positive in the longer term deposits. For two and three-year term deposits, minimum, maximum and average rates have increased over the past year. And, across all five-year term deposits rated, only the minimum rate has decreased (by 0.2%) but the maximum and average rates have increased.

The chance to get a high interest rate on your term deposit is no doubt appealing, but it’s important to think beyond any possible returns and to consider your personal financial situation. Ask yourself when you will need access to your money. For example, are there any big events coming up? Sure, you might think you have budgeted enough money for that upcoming holiday or your best friend’s wedding, but have you also got a bit of leeway in that budget? Five years is a long time to lock away your money, so do not take the term deposit length lightly. CANSTAR has looked at how term deposit rates have fared over the past year; you can read more on that here.

Are there any other reasons why rates increase with longer term deposits?

Banks don’t just pluck a term deposit rate out of thin air; there is a basis for decisions around increasing or decreasing rates. Providers set their term deposit rates around what they anticipate will happen in the wider economy and will sometimes pay a small premium for longer-termed deposits, so they can ensure they have those funds on hand. After all, they need funds available for lending to customers in the future.

Canstar Term Deposits Definition

Choosing a term deposit length, what else do you have to consider?

Even when you do make a financial plan, sometimes life gets in the way, things crop up and you suddenly need access to your funds. While it is possible to break your term deposit, you’ll generally pay a penalty for doing so. Researching early exit penalties is an essential part of your term deposit homework. According to the Banking Ombudsman scheme, if providers agree to let you break the term deposit, you’ll likely lose the interest that attracted you to the savings product in the first place. The provider might also try to get back any interest that it paid out during the length of the deposit. The reduction in interest may depend on how much money you put into the account, the current interest rates and the length of the term. And before committing to a term deposit, make sure you do a thorough comparison of what is available on the market, comparing interest rates, but also the features they offer. Check out Canstar’s latest ratings results, to find out what’s on offer in the term deposits market.

What Is Term Deposits