It is important for us to take lessons from the past because these lessons can stop us from making the same mistakes again in the future, and can arm us with the information we need to make informed decisions. Historically term deposit interest rates have a lot to teach us, even though it appears that pre-GFC the term deposit market was markedly different, we can still take lessons and make comparisons from historical term deposit rates.
Term Deposit Accounts Comparison
The History of Term Deposits in Australia
Term deposits are not a new financial product in Australia, but they have undergone a bit of a makeover in recent years. Historically, term deposit rates:
- Were not competitive before the Global Financial Crisis. Before the Australian Government implemented their deposit guarantee following the GFC, banks were not offering competitive term deposit interest rates, and were not looking to attract term deposit investors. However, now, with deposits up to $1 million guaranteed by the government, Australia banks can afford to offer high interest rates on their term deposits because their offers are secure if the bank can't meet their obligations.
- Were not a secure investment. The Australian Government's guarantee also removed the concerns many Australian investors had about the security of bank investments. Historically Australian banks have been too small to be able to offer a secure investor and so term deposit accounts were not a popular product.
- Major Australian banks didn't need our deposits. Current term deposit rates are competitive to attract deposits because the banks need our deposits to lend out to new customers and to invest in growing their own business. However, historically Australians banks were not interested in competing for term deposit customers because they were able to secure cheaper funding through wholesale bond markets.
- Smaller banks and credit unions didn't need deposits. Regional banks, building societies and credit unions didn't need to compete for term deposit customers either because they were able to get their funding cheaply through securitisation markets.
Lessons You Can Learn From Historical Term Deposit Rates
If historical term deposit rates were not competitive and the banks have only recently realised that they can benefit from encouraging long term fixed deposit customers, then what can you learn about current term deposit rates by looking back? When you compare historical term deposit rates to current term deposit offers:
- There is always a cycle of rates. Even though historically term deposit rates were not actively as competitive, there is always a cycle in interest rate movements. There is never an extended period where the official interest rates are steady or kept low, instead interest rates rise and fall and rise and fall again over time. Therefore, as you compare current term deposit interest rates, consider where we are on the interest rate cycle now, and where we will be when your term deposit matures.
- The banks offer great term deposit rates when they need you. This is something we can see when looking at historical interest rates, where Australian banks previously didn't need term deposit customers as they could secure cheap funding elsewhere. Now that term deposit accounts have become so easy to use, and Australian banks are encouraging private investors to take advantage of fixed terms, consider what will change with the end of the government guarantee. Many Australians are comfortable investing in term deposits because their deposits are guaranteed, however, when that security is removed, the banks my lose a lot of their term deposit customers and in turn a lot of their funding. Therefore, in order to attract term deposit customers back, isn't it possible the banks will become even more competitive with their interest rates?
- You never know what is in store for the finance and banking industries. There could be another financial crisis, a crippling recession or a change in banking or finance legislation which changes the term deposit landscape once again. For example, consider the affects of the deregulation of interest rates in the 1980s, where previously the banks' interest rates were set by legislators or the Reserve Bank, not the individual banks themselves.
For more information about term deposit products offered by the top Australian banks, or to compare current term deposit interest rates, view our comparison tables here. You can also follow secure links from our comparison tables to each provider's website where you will find more details of each term deposit product, and you can start an online application to lock in a great term deposit rate today.