Right now my bank is offering 3.45%, which is a 43% decline.
That’s a hefty pay cut, if your term deposit nest egg is a key source of income.
Sadly, things will probably get worse before they get better.
Markets see another 0.25% cut to the Official Cash Rate (OCR) later this month, and potentially one more after that, depending on how the economy develops in early 2026.
Against that backdrop, term deposit rates are almost certain to go lower from here, and they could fall below 3%.
Remember you’ve got to subtract tax and inflation from that as well.
Negative returns, anyone?
If you’re staring down the barrel of a halving in your term deposit income, your options are limited.
You can adjust your lifestyle and reduce your spending to match that lower income, you can start dipping into your capital, or you can try and get that money working a bit harder for you.
To each their own, but for many savers option number three might sound like the best one.
While 6% was a reasonable hurdle, it’s not too difficult to beat three.
However, many of the alternatives out there will involve moving up the risk curve and introducing more volatility into your investment mix.
Fixed income (or bonds) is the natural option, as this would make for a modest income boost while keeping the risk profile relatively conservative.
Property and shares are the next cabs off the rank, with the returns from these asset classes typically well above what one would receive in a term deposit.
The current residential rental yield is 3.8% and New Zealand house prices have typically grown 5-6% annually over the past 30 years.
The costs of property ownership can be high, so one needs to account for rates, insurance, maintenance and the like, as well as the hassle factor, which can be high.
New Zealand shares have returned 8.5% annually over the past 30 years, while higher-growth US shares have delivered 10.5% per annum.
Those numbers include dividends paid, which can vary depending on the market.
New Zealand shares are a good income generator, better than property in fact, and the dividend yield is about 4% (including imputation credits).
Sectors like utilities, infrastructure and real estate offer higher yields of 6% or more.
For international shares you should only expect 1-2%, with the vast bulk of your return likely to come from capital gains.
A share portfolio doesn’t manage itself either, but the running costs are much lower than a rental property and it’s obviously more hands-off.
However, before you move all that term deposit money into a US share fund, consider the much higher level of volatility you’re likely to face.
Historically, US shares have experienced a 10% fall every two years (on average) and a larger 20% plus decline about every 6.5 years.
Your long-term returns will be excellent, but you must be prepared to lock your money up for at least 10 years and to stay calm during those inevitable rough patches.
It’s a similar story for property, albeit the volatility is likely to be lower to match the more modest returns.
The past few years are a good example.
New Zealand house prices fell 18% from 2021 to 2023, and they’re still 3.5% down from three years ago.
The income drop that term deposit investors are facing can certainly be filled, but it will come with a few trade-offs.
A combination of fixed income, diversified PIE funds, real estate, and income-generating shares will almost certainly deliver better bang for your buck over the coming period.
The exact combination depends on the individual, and it’s probably time you spoke with your investment adviser.
Mark Lister is Investment Director at Craigs Investment Partners. The information in this article is provided for information only, is intended to be general in nature, and does not take into account your financial situation, objectives, goals, or risk tolerance. Before making any investment decision Craigs Investment Partners recommends you contact an investment adviser.
