Deposit rate drop: Returns in the bank plummet to new lows

Investors are being urged to look around at other options for their money as deposit rates at the bank plunge to all time lows.

A $10k investment in a one year term deposit is now only earning around $113 in the bank compared to seven years ago when the money would have earned $409, research by Canstar has revealed.

And the returns are even worse for savings in bonus saver or flexible saver type accounts – some of the most common accounts held by Kiwi savers.

In November 2012 a $10k deposit in a bonus saver account would have earned $319 in interest but that has dropped to just $51.

Likewise money in a flexible saver account would have earned $259 in November 2012 but now would only garner just under $28 in interest.

Jose George, general manager of Canstar New Zealand, said the low rates were a wake up call for investors to think about how better to manage their money.

“If there is any positive out of this with these kinds of interest rates I think it is about time people get more serious about looking at what their money is doing for them. How they make their money work better.”

Bank deposit rates have fallen on the back of cuts to the official cash rate.

In March the Reserve Bank cut the OCR to a record low 0.25 per cent as the global coronavirus pandemic began to hit and the Reserve Bank has indicated it could take the OCR negative next year.

That has seen the average six month term deposit rate fall from 3.26 per cent in October 2018 to 0.93 per cent in October 2020.

Despite lower rates money continues to pour into the banks. Total deposits rose from $359.1 billion to $394b in the year to September 30.

Term deposits have fallen from $195.8b to $178.2b but money going into savings accounts has risen from $83.7b to $105.25b.

George said it was still a good idea to have savings in the bank to take care of emergencies and unforeseen expenses with experts recommending a buffer of three to five months cover for expenses

“We are not suggesting by any means that you need to clean your money out of the bank completely.”

But he said it was questionable whether the amount people could get on a term deposit meant it was worth locking the money in.

Financial adviser Liz Koh, said money in the bank had a specific purpose and that was to provide liquidity, ease of access, and stability.

“Any money where you need those attributes needs to be still in the bank and you just don’t worry about what interest rate you are getting on it.

But she said money in the bank should not be investment money.

“You don’t go to the bank to invest your money you put money in the bank to have it on hand until such time you plan to spend it in the short term – if you get interest on it that is just a bonus.”

She said those looking for an investment return needed to look elsewhere and she urged retirees who hoped to live off the interest on their savings to forget it.

“Those days are absolutely gone. You can not live off the interest or the return on your investment in retirement any longer. So you have got to forget that idea and plan on a gradual reduction of capital over the remaining years of your life.”

Koh said over 65 year olds could consider investing in KiwiSaver if they did not need the money for the next five years.

For those not retired she said diversification was key.

“It needs to go into a diversified portfolio. A lot of people are already investing in shares and property directly. You have just got to make sure you do your homework before investing in those things.”

Tom Hartmann, personal finance editor at Sorted – the Government’s money education website, said once inflation and tax were taken into account people were “basically rolling backwards” if the money was not earmarked to be used in the next year or two for short-term expenses or being kept as an emergency fund.

He said those looking to invest their money elsewhere needed to consider when they needed to spend the money and how they felt about the ups and downs of an investment.

More retirees were using KiwiSaver because of the low interest rate environment and due to the recent change which had enabled over 65s to join the scheme, he said.

But Hartmann said the low interest rate environment also meant it had greater concerns about people getting caught in scams or investing in things they did not understand.

“We definitely advocate for increased due diligence, doing your homework and research.”

Hartmann said it was helpful for people to know where interest rates were at now to know what the norm was and set expectations.

“The old adage if something is too good to be true it probably is. In this environment if something is paying 10 per cent – that is a red flag.”

Investments sold by cold calling, which is illegal in New Zealand, were also a red flag, he said.

“If you are contacted out of the blue – cold calling is illegal but still scammers will pray on this sense of this is your opportunity, don’t tell anybody about it – it is exclusively for you – any air of exclusivity is a red flag.”

Hartmann said in general it recommended managed funds, of which KiwiSaver is one type, as the investment type was well regulated and more transparent than others and allowed people to diversify with small amounts of money.

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