When the honeymoon rate for term deposits is over, many customers find themselves in low interest-bearing accounts.
In this article we look at:
Terms of Resentment
An ASIC survey in 2010 revealed seven out of eight institutions offering term deposits operated a 'dual pricing system'.
- Many were actively promoting a couple of high interest rate terms as an example of their term-deposit offerings, while fixing low rates on up to 10 of the remaining terms.
- All the institutions ASIC looked at automatically rolled over maturing term deposits into a new deposit for the same term at the prevailing interest rate, unless otherwise instructed by the depositor.
- So unless the investor intervened, their money would likely be rolled from a high interest to a low interest-bearing account and remain locked in at that low interest point for the new term. In fact, this happened up to 83% of the time in the institutions that provided data to ASIC.
“Large and sudden rate cuts on term deposits are unjustified and done only to benefit banks, giving them access to cheaper money from depositors who forget to check their rates at rollover,” says ME Bank’s Michael Donohue, summing up some banks’ approach to getting their paws on cheap term deposit funds.
ASIC made several recommendations in the 2010 review, some of which of the banks have since implemented. These include:
- Disclose the interest rate to be paid on rollover
- Provide interest rate schedules in rollover letters
- Disclose the risk of dual pricing in Terms and Conditions and rollover letters
As a result ASIC says investors have saved billions of dollars as their money has rolled into high instead of low interest rate deposits.
What are term deposits?
Term deposits fix your savings for terms up to five years in 30-day increments and interest is generally payable at the maturity of the term. Funds are not available at call, but term deposits can be broken at any time by paying a break fee.
Term deposits traditionally offered higher interest rates than at-call savings accounts, particularly over longer terms, but that has changed over the past few years with the advent of online saver accounts offering bonus rates for a fixed period.
Around 95% of funds in term deposit accounts are held by people aged over 38. Younger consumers tend to choose online accounts for their convenience and immediate access to their money. Online accounts also usually pay interest monthly instead of at maturity of the term, which can lead to higher returns from compounding interest.