Our Treasurer, Graham Tooley, looks at Term Deposit rates and poses some questions that all investors should ask before locking their money away.
Have you ever wondered why a financial institution may be offering 6.00% p.a. for a 6 month Term Deposit but a measly 2.50% p.a. for a 5 or 7 month term? Why another has 6.00% for a 7 month term but only 3.75% for a much longer 11 month term?
There are entirely plausible reasons why financial institutions move their “specials” from term to term, but investors should be alert to the more sinister strategies that underlie those unusually low rates on the card.
Moving a special rate from one term to another is most commonly done to smooth the maturity profile of an institution's Term Deposit portfolio. Particularly for smaller organisations, it is preferable to not have large concentrations of deposits maturing in a particular week or month.
This practice typically isn’t harmful to investors as long as all terms on offer are fairly priced in comparison to each other.
The institutions to be wary of are the ones that have hugely disparate pricing from one term to another. In a report ASIC released in March 2010, they referred to this practice as “dual pricing”.
The mischievous aim of dual pricing is to catch investors “asleep at the wheel” when their deposit matures and potentially roll them into a rate considerably less competitive than what they would receive for a different term.
If that excellent 6 month rate you took last September is now offered at a dud 2.50% you’d want to have plenty of notice and opportunity to change your arrangements.
To quote ASIC:
“Because term deposits can renew (or ‘roll over’) on a default basis (unless the investor intervenes), this dual pricing practice would appear to create a risk that a term deposit could roll over automatically from a higher interest rate to a lower interest rate, without the investor being conscious of the change.”
Some may claim that it is entirely the investor’s responsibility to be aware of what terms they are rolling into, but there is nothing fair about the practice of dual pricing and no meaningful justification as to why a customer-focussed financial institution should engage in it.
Next time you’re comparing Term Deposit interest rates, look past the shop front specials and check the rates for all terms. You’ll soon see if they are playing games.