15 May 2012

The on-going commentary concerning bank and interest rates is primarily aimed at home mortgage lending. This is mainly due to politicians wanting to be seen as the mortgage holder’s friend and to be helping “working families” who tend to be borrowers, not lenders.

What goes missing in this round of bank attacks is that lenders to banks – that is, people with deposits in the bank – are relatively better off than they otherwise would be if banks passed on all of the RBA rate cuts to both borrowers and lenders. One of the few good things to come out of the 2008 financial crisis for self funded retirees is that the competition for term deposits has never been more pronounced. As shown in the graph accompanying this article by Don Stammer, the margin for term deposits over the official cash rate is at its highest for many years – indeed it may even be at an all time high.

One of the reasons for this is that, since the financial crisis, the banking regulators have pushed the banks to hold a greater proportion of their funding base as retail deposits. As there is only a given amount of money in the deposit market at any one time, the banks can only increase their market share at the expense of another bank – and this competition is pushing term deposit rates relatively higher. Remember the official cash rate is only 3.75% yet it is still possible to get 1 year term deposits at 5.25% – some 1.5% above the cash rate in a market that is expecting further rate cuts!

Whites IFM now offers a term deposit management service where we can access the best term deposit rates on any day from some 25 different financial institutions. We handle all of the administration to make it easy for our clients to roll over from one deposit to another. For more information on this service, please contact us directly by email, phone or using the Enquiries section on this web site.