Term deposit interest rates have a bright future for savers and seniors

The current average rate for one-year term deposits of 3.6 per cent is higher than it has been for most of the past 12 years, and some banks are offering rates above 4 per cent – although that is still lower than the best rates on other savings accounts.

But unlike online savings accounts, bonus saver accounts with conditions and accounts with promotional introductory rates, with term deposits you simply get what you see – your rate is locked in without having to jump through hoops to get paid.

However, savings specialists say there are a few term deposit pitfalls to understand before signing up.

After higher-than-expected inflation data and Reserve Bank governor Michele Bullock warning interest rate cuts might be over, financial markets are not pricing in a cut until late 2026 and some economists believe the next move will be up.

Mozo personal finance spokeswoman Kylie Moss said over the past month some banks had been increasing some term deposit rates.

“Those rates are only coming up slowly as banks see the chances of another RBA cut this year as unlikely and expectations for more cuts next year diminish,” she said.

“Previously the trend for this year has been a consistent drop in term deposit rates while savings rates have remained closer to their peak.

“But banks will need to remain competitive and so we expect some providers leaning into more competitive rates for shorter terms or special offers. For savers and retirees that actively seek out deals, we fully expect there to be good competition among the top rates on offer. “

Canstar director of data insights Sally Tindall said the “prickly terms and conditions” wrapped around on-call savings accounts could make term deposits an attractive option for set-and-forget savers.

“Term deposit rates are typically based on a range of factors, but a key one is the future of the cash rate,” she said.

“These rates can often shine when banks price in expected rate hikes that don’t materialise.”

This was not the case right now, Ms Tindall said. She said the interest differences between at-call rates and term deposits could potentially be ironed out by shopping around.

“Right now, the highest term deposit rates are sitting just below four and a half per cent,” she said.

“However, if the cash rate ends up staying put for a while, or if it looks like the RBA might revert back to rate hikes in the future, we could see some of these rates start to rise.

“It’s great that deposit rates are now out of the doldrums and the days where the average new customer term deposit rate was sitting at just 0.3 per cent. That was just three and a half years ago.”

Ms Tindall said there was now a bigger disparity between the highest and lowest term deposit rates.

Term deposits have been a popular choice for retirees, but recent research from the Commonwealth Bank found they were becoming increasingly popular with younger investors and self-managed super funds.

CommSec executive general manager James Fowle said customer allocations to deposits had been climbing quickly among 18- to 24-year-olds.

“For investors, cash is no longer a passive parking spot – it’s part of their portfolio strategy,” he said.

Just like at-call savings accounts have traps that can catch out customers, so too do term deposits.

Mozo’s Ms Moss said one was the loyalty trap caused by sticking with one bank. The best rates on offer today are from smaller banks, rather than the big four. Savers in Australia are protected by a government guarantee on bank deposits capped at $250,000 per person per financial institution.

Another potential trap is failing to check what your interest rate reverts to at the end of the term.

“Plan ahead to avoid the auto-rollover sting,” Ms Moss said.

“Just because you got a good rate on your initial deposit does not mean you will be offered a good rate once your deposit is ready to be reinvested,” she said.

Savers should also understand the penalties for withdrawing money from a term deposit before its end date, Ms Moss said, and should also consider the strategy of “laddering” which involved splitting your full deposit amount across different terms.

“You can access some funds sooner while locking in higher rates on longer terms, it offers flexibility to reinvest at better rates if conditions change,” she said.

This article first appeard in The Australian as Term deposit interest rates have a bright future for savers and seniors