Rising interest rates bring many disadvantages to individuals in the economy – especially for anyone with debt – so it’s unsurprising that most of us approach the news of another rate hike with trepidation.
But one key advantage of higher rates is the better returns on savings accounts and term deposits.
Over the last 12 months, we’ve seen term deposit rates in Australia jump from around 0.5% to over 5.0% as a result of the RBA’s ongoing rate increases to try and quash inflation. Many economists now believe that the Reserve Bank of Australia (RBA) is coming to the end of this period of regular increases, and there’s mounting pressure to start bringing rates down in the near future. This makes it a great time to consider a term deposit if you’re looking to take advantage of the current high rates, predictable returns and virtually no risk of loss.
The main advantage of a term deposit is that your returns are guaranteed. There’s no market volatility risk and you know exactly what you’ll end up with at the end of the agreed term. They’re also usually low cost, with no set-up fees, making them easy and accessible to a wide range of investors.
One major disadvantage is the lack of liquidity – term deposits are designed to lock your money away for a fixed period of time. Once you commit to the period, you’ll have to pay a break fee if you need to access your money before the agreed term is up. The good news is that there are a wide range of different terms on offer, with the shortest time period usually 3 months. This means you can choose a length of time that suits your needs.
Another potential disadvantage is that you might miss out on higher returns if other investment markets (shares, property, infrastructure) outperform the interest rate on your term deposit. Market volatility works both ways and can lead to high returns if you buy in when prices are low. However, there’s no easy way to predict this as market performance depends on such a wide range of factors, not just the RBA’s interest rates.
No one knows for sure if interest rates will continue to rise or if they will do a U-turn and start to reduce. But I do know this – if you are offered a risk free investment return of 5% pa it is certainly worth considering for part of a diversified investment portfolio.
Contact us if you’d like to know more about whether a Term Deposit is right for you.