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Good terms: How to get the most out of locking your money away

The Global Financial Crisis has had very few upsides, but one of them has been to create the financial equivalent of a perfect storm for term deposits.

We’ll get back to that shortly, but first a bit of background.

A brief history

The most visible effect of the economic downturn has been the hammering of share markets, even in countries with robust economies. The Australian share market, for example, is still down about 40 per cent from its 2007 peak, and there’s no shortage of doomsayers predicting that further losses could be in store if Greece, Spain or Italy cause the eurozone to go into meltdown.

Nor has there been any joy in property investing where, after decades of impressive returns, prices in any housing market not located next to a mine have either stalled or slammed into reverse over the last few years.

And it’s not just mum and dad investors who’ve had to adjust to more straitened circumstances. The days when Australian banks could borrow money cheaply from overseas are long gone and don’t look like returning any time soon.

Good news for Aussies

Yet it’s not all bad news, at least for those banks’ potential customers. Unable to easily source money from overseas, financial institutions have taken the old-school approach of encouraging Australians to lend it to them, in the form of making deposits.

It is believed that nearly 60 per cent of major banks’ funding now comes from deposits ”“ the highest ratio in 14 years. In fact, as Guy Debelle, assistant governor of the Reserve Bank, observed earlier this year, banks want your money so badly that they’re doing special deals just to convince you to hand it over.

As Debelle put it, “Banks have been increasingly paying customers more than the rate advertised in the window if the customer asks for it, reflecting competitive pressures.”

The benefits of term deposits

Even without being bailed up by demanding customers, banks, credit unions and building societies have been raising interest rates, lowering fees and introducing greater flexibility to term deposit accounts to encourage Australians to hand over their money for periods of time ranging from a month to five years.

You can now get a (government) guaranteed return on your money of between 4 and 5.8 per cent. Putting your spare cash in a term deposit might not be the most exciting of investment strategies, but it’s worth asking yourself if you’ve seen that kind of return in recent years on the money you’ve ploughed into shares, property or your super fund.

If the answer is no, it might be time to consider whether a term deposit is the safest and smartest place to park your money.