Beating the Cash Rates
Cash rate increases only mean bad news to many people. The main reason is because most of us have to fork out even more of our income towards the repayment of mortgages, personal loans and credit cards. However, a rate rise is not all bad news. If you can afford to park some of your money away, you can take advantage of higher interest earned on that money.
The answer to capitalizing on the high cash rates may already be quite obvious to many people who are already enjoying earning healthy interest rates delivered through their online savings accounts. These are currently paying interest just above the cash rates. However, there are better options out there. So what are they?
Parking your money in term deposits is something to consider. You may think that term deposits have way passed their prime after the introduction of online savings accounts. But by examining the chart below, you will notice that parking $10,000 in a 1 year term deposit may earn you an average of 7.08%.
The chart here depicts the average rates of the top 10 highest paying term deposits in Australia across 10 different terms.
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| Source: CANSTAR CANNEX 12/10/2007 |
Taking a closer look at the chart, you will also notice that you are far better off opening a term deposit with a longer term than a shorter term as shown by the disparity between, say, a 30 day term deposit versus a 1 year term deposit. However, the assumption of earning even higher interest rates in term deposits with maturity longer than 1 year does not seem to hold. Looking at the chart, you will notice that average rates decrease significantly as the maturity terms increase beyond 1 year. So the obvious choice would be to park your money in a 1 year term deposit, then rolling it over into another 1 year term.
Some people may be curious as to why term deposits are still offering such attractive rates in an era when online banking is reigning supreme in the savers' market. There are two reasons for this. The first reason is the fact that banks can better match their deposit takings with their investment terms. This cannot be said for many of the at-call deposit accounts out there, where customers may decide to withdraw at any time without affecting their interest earned. Another reason can be attributed to banks trying to attract more local funding, instead of an over-reliance on overseas funding of its deposit books.
Whatever the reason is, term deposits will not be falling out of favour anytime soon. Apart from the interest-rate difference, there are two reasons why you may want to consider a term deposit over an online savings account. Firstly, term deposits can help you to stay disciplined and avoid the temptation of withdrawing your money too soon. Secondly, you can also match the term deposit with the timing of when you will need your cash flow. This is especially relevant if you are saving up for that big holiday or that brand new car.
The take home message for everyone considering term deposits would be to park your money in a longer term deposit up to 1 year and if you want to leave your money for a much longer term, say, 3 years, you are better off parking in a 1 year term deposit and let it rollover from year to year if the interest rates continues to remain attractive.
Check out RateCity's top 5 highest paying 1 year term deposits for an amount of $10,000 below:
| Term: 1 year | ||
|---|---|---|
| Rank | Company | Effective Rate |
| 1 | Macquarie Bank | 7.534 % |
| 2 | NSW Teachers CU | 7.3357 % |
| 3 | Bankwest Direct | 7.2823 % |
| 4 | ING Direct | 7.25 % |
| 5 | Home Building Society | 7.15 % |
| Source: www.canstarcannex.com.au 12/10/2007 | ||
How do I compare Term Deposits?
RateCity is the best website to shop around on for over 8000 term deposits and debentures and most other financial products. At RateCity, you can use expert comparative data from CANSTAR CANNEX, Australia's leading financial research and ratings firm. CANSTAR CANNEX has analysed and evaluated hundreds of financial products to award five stars to only the very best. The CANSTAR CANNEX star ratings go much further than just looking at interest rates. They also take into account important features so you can be confident you are getting the best product.
Use our easy search tools to compare term deposits at RateCity.
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