The top term deposits for your SMSF

Co-founder of the Switzer Report
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An interest rate cut on Tuesday 1 May of 0.25% is a foregone conclusion – even the Reserve Bank of Australia (RBA) is not deaf to the concerted campaign being mounted by ‘old world’ interested parties to get them to act. That said, and despite all the noise, I am not convinced that there are many more to come after this, and still believe that by the end of the year, interest rates will be heading higher again.

Since I made this call in early January (when some of the interest rate bulls were factoring in four cuts this year – read How low with the RBA go), the professional interest rate markets have been fairly flat. Long-term bond rates have risen a little and short-term bank-bill rates have fallen a smidge, with the net effect that the yield curve has steepened.

For the term deposit investor, where there is the added risk of the spread (or premium) that banks will pay to attract ‘retail’ funds, there has been little overall change. The following table shows the average term deposit (TD) rates for the four MTBs (major banks) as at 6 January and 13 April:

Note: For term deposits of more than $50,000, with interest on three- and six-month TDs paid on maturity, interest paid annually on one-year and five-year terms.

With 90-day and 180-day bank-bill rates now down to 4.23% and 4.25% respectively, the professional markets have fully priced in the expected rate cut by the RBA. Term deposit investors shouldn’t be concerned about this move because this is already priced into the rates being offered by the banks.

It is interesting to note the range in rates being offered by the banks for different terms deposits. This is occurring despite the existence of the $250,000 Government Guarantee, which operates on a per client per institution basis. For example, an SMSF could have $250,000 on deposit with Bank A, $250,000 on deposit with Bank B and $250,000 on deposit with Bank C, and each of these deposits would be government guaranteed. The following table highlights the differences in rates available:

Institution
3 mths
6 mths
1 yr
2 yrs
3 yrs
5 yrs
Term
MAJOR BANKS
ANZ1.10%1.05%1.05%1.00%1.00%1.01%
Commonwealth1.05%1.20%1.70%1.10%1.10%1.25%
NAB1.05%1.20%^1.00%1.00%1.00%1.10%^ 7 months
Westpac1.05%0.90%1.00%1.00%1.00%1.00%
REGIONALS
ME Bank1.65%1.75%1.70%1.50%1.50%1.50%
Bank of Queensland1.35%1.60%1.35%1.25%1.25%1.25%^^ 48 less than 60
BankWest1.20%^1.20%1.20%1.15%1.15%1.25%^ 4 months
Bank of Melbourne1.05%0.95%1.05%1.05%1.05%1.05%
Macquarie Bank1.75%1.75%1.75%1.40%1.45%1.50%
St George1.05%0.95%1.05%1.05%1.05%1.05%
Suncorp Bank 1.40%^1.45%1.30%1.20%1.20%1.20%^ 4 months
ONLINE BANKS
ING Direct0.85%1.55%1.60%1.60%
RaboDirect1.70%1.80%1.70%1.20%1.05%1.50%
Ubank1.60%1.55%1.50%
CREDIT UNIONS
CUA1.60%1.65%1.70%1.20%1.20%1.10%
MUTUAL BANKS
Teachers Mutual1.25%1.25%1.35%1.30%1.30%

Where to invest

Well, I think it pays to stay relatively short (six to nine months) and avoid the middle part of the yield curve (one to two years) where it kinks. UBank has the pick of the six-month terms paying 6.01%, followed by Bank of Queensland offering 5.90%. Even the majors at 5.50% aren’t too far off the pace.

If you are more interested in the major banks, Westpac currently has an interesting special rate of 5.55% for a nine to 10-month term and this would take you out to February 2013.

RaboBank continues to set the pace in the five-year term, paying 6.50% – a massive 0.80% premium to the major banks. When you consider that the five-year government bond is yielding only around 3.48%, this rate really stands out.

While I think that government bond yields are heading higher over the medium term, there is a lot of protection built into this rate compared with the option of investing just for six months and then rolling over the term deposit every six months thereafter. Hard to go past.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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