A leading bank is hiking up its deposit rates in a bid to level the playing field between borrowers and savers.
With the Official Cash Rate (OCR) sitting at 0.25 percent for almost a year, record-low interest rates have made it more attractive to borrow than save. As term deposits offer savers a fixed rate of return for a set period, they're generally considered less risky than other investments, such as property and shares.
On Monday, ASB announced a 1.75 percent interest rate on term deposits for five years, while competitors ANZ, BNZ, Kiwibank and Westpac still offered 0.90 percent.
ASB has also made small adjustments to it’s shorter term deposit rates. The bank’s 9-month term deposit rate will rise from 0.75 percent to 0.80 percent. It's four-year rate will increase from 1 percent to 1.50 percent.
ASB executive general manager of retail banking Craig Sims, says as record-low interest rates have benefited borrowers for some time, the bank wants to accommodate savers.
"While there's been much focus on home loan rates, customers with funds to invest are often seeking to balance their portfolios and term deposits can be an important part of the mix,” Sims said.
"Given the performance of the New Zealand economy through COVID-19 has been stronger than anyone anticipated and our commitment to helping the financial progress of all New Zealanders we're pleased to be able to support our savers with these market-leading term deposit rates."
Mint Asset Management head of sales and marketing David Boyle said the 5-year term deposit rate of 1.75 percent is lower than the potential return an investor could receive from an income fund over the same period.
But he also says investment choice comes down to time frame, what savings will be used for and whether an investor wants to preserve their capital or grow it.
"[For example], using a 'conservative fund' which is invested in 70 percent income assets (bonds, fixed interest and cash) and 30 percent growth assets (shares and property), the 5-year return* of that fund to January 2021 (before tax, after fees) was 4.9 percent," Boyle says.
As managed funds require a minimum investment time frame of three-to-five years, term deposits can be helpful for those who plan to use their savings in the short-term and want to earn interest in the meantime. Examples would be a saving a rainy day fund, a house deposit or for a holiday or car.
"Term deposits offer a known rate of return for a specified period of time, Boyle adds.
"As managed funds are based on market and manager outcomes and can only tell you what it has returned historically, the actual return on investment can be higher or lower at any stage of the market cycle."
Reserve Bank figures show the average deposit rate on five-year terms was 0.96 percent in December 2020, down from 2.64 percent in December 2019.
ASB’s new term deposit rates take effect from Tuesday, March 2. Savers are required to have at least $5000 to invest.
*Source: Zenith monthly funds performance tables, Mint diversified income fund.