There are times when term deposits look sexy. In a stock market or property market crash in which capital is vanishing before your eyes, term deposits will make their owners very happy indeed.
They may not offer the best returns but there are ways of squeezing a bit more out of term deposits. One is to ensure you are getting the best interest rate to begin with, which may mean moving banks or to a building society or credit union.
Some term deposit rates are poor and banks get away with them because investors simply roll the money over when the deposit term ends without shopping around.
Canstar, which released its annual term deposit report this week, noted that we've turned into a nation of rate chasers. So we should. But beware. As Canstar pointed out, if there is a lag between one investment ending and another starting, you're losing valuable interest.
A real no-brainer is to use term PIEs. They're term deposits that are taxed in a more favourable way. Because you pay less tax you get a higher effective return. For example, if you invested in the ASB two-year term fund (minimum $10,000 investment) your 4.5 per cent interest rate would become 4.72 per cent for a 30 per cent taxpayer or 4.93 per cent for a 33 per cent taxpayer.
"If you are a higher rate - 30 per cent or 33 per cent - taxpayer it is definitely advantageous to use term PIEs to maximise your returns," says Canstar general manager Derek Bonnar.
A new - for New Zealand - style term deposit is the notice saver account. Like a term deposit, you deposit the money for a set period. It is not released automatically at the end of the period. To get the money back you need to give a certain number of days' notice - usually 30 or 90 - to withdraw it.
Notice savers have several advantages. One is that often the interest rate is higher than equivalent term deposits. Another is that you aren't constantly completing paperwork when the term ends. And a third is you can deposit money into the account as and when you want.
The money simply stays there on a relatively high interest. It is important, however, to track that interest rate from time to time to ensure that it is competitive.
The major disadvantage of a notice saver is that the interest rate is not fixed as it is with a term deposit. You don't get the certainty of income you would with a term deposit, says Bonnar. What's more, if you're leaving the money in the notice saver for longer periods than the 30 or 90 days' notice you may have been better off with a longer term deposit.
There are other alternatives to the term deposit.
Some investors simply use higher interest call accounts. All this tying your money up doesn't necessarily give you a higher interest rate. Heartland Bank, for example, was offering 4.5 per cent on call this week. That's higher than you can get for up to six months at any bank, building society, finance company or credit union. In fact it's higher than Heartland Bank's own term deposit rates up to and including six months.
There are two main downsides to this. One is that Heartland Bank has a BBB credit rating, which is lower than all of the high street banks. The other downside is that like notice savers, the interest rate can change.
Such high rates are often an inducement to get you through the door and then the interest rate is quietly dropped a few months down the track.
Another high interest account that some people use instead of term deposits is the on call bonus saver. On the surface, these accounts have high interest rates. For example, Westpac is offering a 4.2 per cent potential rate for its Online Bonus Saver. If you break the rules, however, you only receive the paltry base rate. For the Westpac account that's 0.10 per cent.
Those rules can be that you have to deposit a certain amount of money in each month or that you can't make withdrawals.
If you have a mortgage as well as money to save, then consider putting your "term deposit money" into a revolving credit mortgage. That gives you the equivalent return of the mortgage interest rate, which is going to be 1.5 to 2 per cent better than any term deposit rate you can get from the bank. Don't forget to factor in fees when doing the sums.
Bonds are another fixed-interest option. They pay higher interest rates than term deposits, but can be riskier because your capital can rise or fall a little according to market forces.
Moving a little further away from super-safe investments, high dividend paying stocks can provide a regular return, but greater capital gain. If you're investing your money for the long term, but need to live off the interest, then consider investing it in a basket of individual stocks offering good dividends or a managed fund that pays income.
If you've recently retired, think twice before moving your KiwiSaver funds into a term deposit.
Sometimes it's better to leave the funds growing where they are and take regular withdrawals as and when you need the money. It's likely that your nest egg will last longer that way.
Until the mid-2000s finance company debentures were paying fantastic interest rates. History shows why. They were incredibly high risk.
There are still some finance companies around. Other than Liberty Financial, which has a modest BB+ credit rating, none was offering bank-beating rates this week.
Another option - albeit risky - is to invest your money through a peer-to-peer lender. The only one I'm aware of operating in New Zealand at the moment is HarMoney. The idea is that you lend direct to borrowers and take most of the margin that the bank would have got.
At the bank you might have got 4 per cent with the bank taking 20 per cent from borrowers. That's a large margin. With peer-to-peer lending you get the margin less the service fee of 1.25% that HarMoney takes as a provider. I've invested some play money through HarMoney out of interest, but would be wary about putting too many eggs in this basket. Having said that, both Trade Me and Heartland Bank have bought shares in HarMoney, which suggests that it has passed their due diligence tests.
I still can't quite feel comfortable with my tiny investment.
There are changes afoot in the term deposit world. Banks are starting to impose minimum notice day periods for customers who want to break term deposits. Be aware that it's becoming harder to break term deposits.
