Real After Tax Term Deposit Returns for Australian Savers are Negative; Savers Punished. Debtors Rewarded. Tax and Inflation Work for Borrowers and Against Savers.
Tweet Topic Started: 6 Mar 2012, 11:00 AM (20,806 Views)
This chart shows the real (inflation adjusted) after tax returns on term deposit accounts for Australian savers. Savers who leave their money languishing in bank accounts are obviously being severely punished for their foolishness. The effective return on their capital is zero to negative.
Meanwhile, sensible homeowners enjoy capital gains, no rent to pay, stability of tenure, negative gearing benefits, and inflation reducing the real value of their home loans, leading to a comfortable rent-free, debt-free, asset-rich retirement. No wonder so many smart people aspire to home-ownership.
Super low interest rates is like throwing to many bananas into the monkey enclosure. There will be waste. I fear that if this dog and pony show gets back on it's feet we may see interest rates move up. Peter :pop:
When the demand for money falls so does the interest rate.
And that would be fine if it were not for endogenous money creation, which pulls demand forward, which drives asset prices higher, creating further demand for credit that would not otherwise exist. Fortunately, this can only go on so long. Eventually asset prices go so high that even zero interest rates cannot make them affordable.
After a mad scramble by the banks to sign up savers with juicy interest rates, the gloss has come off keeping cash in the bank.
Cheaper finance for the banks is triggering a fall in term deposit rates, despite no move in the official cash rate by the Reserve Bank for almost a year.
Analysis by financial comparison website RateCity shows banks have been gradually winding back the interest rates paid to savers since the start of the year as the war for deposits comes to an end.
A comparison of 82 different term deposit providers found average one-year term deposit rates had fallen from 3.55 per cent to 3.48 per cent in July.
That’s still above the 2.5 per cent cash rate, but it’s not quite the returns of 5 per cent that were on offer a couple of years ago.
Three-month term deposit rates dipped even more sharply from an average of 3.41 per cent return at the start of the year to 3.27 per cent in July.
RateCity product director Peter Arnold said savers with term deposits would have to be on top of their game and keep comparing banks to find the best rate.
“2014 has seen things go from bad to worse for those with money in the bank. Term deposit rates have been trimmed across the board,” he said.
Australia’s ‘big four’ banks have been quietly cutting their term deposit rates, with some offerings now 20 basis points below where they were a month ago, The Australian reports.
Commonwealth Bank and Westpac have reportedly cut their five-year term rates by 20 basis points each, to 4 per cent and 4.15 per cent respectively, while National Australia Bank and ANZ Bank have shed 0.15 per cent and 0.18 per cent, respectively. It leaves NAB’s current rate at 4.05 per cent and ANZ’s at 4.04 per cent.
The reduced competition for deposits is seen largely as a result of the ease of raising funds overseas.
It has also allowed for stronger competition in the mortgage market, with home loan rates hitting fresh lows a fortnight ago. However, the lower funding costs are seen offsetting the rise in property loan competition.
“While asset competition has increased we would flag that there has been a substantial reduction in funding costs which will offset the impacts,” Deutsche analyst James Freeman said, according to The Australian.
Australia's big banks are quietly making significant cuts to the interest rates paid on term deposits, as lenders compete less keenly for household savings.
While the Reserve Bank has not moved official interest rates since August last year, new figures show interest rates across three-month, six-month and one-year term deposits have been cut in recent months.
The cuts are likely to affect pensioners and self-funded retirees in particular, as rate reductions erode the income they receive from their retirement savings.
Three-month term deposits have fallen the most, with NAB, Westpac and ANZ all cutting rates by at least the size of an "official" RBA move of 25 basis points since June, or a quarter of a percentage point, according to interest rate comparison website RateCity.
All the major banks are now paying less than 3 per cent on a term deposit over the popular term of three months, the figures show.
Average rates on six-month term deposits have also dropped 11 basis points since July, with all of the big four also dropping rates below 3 per cent. One-year term term deposit interest rates have fallen by a similar amount, to 3.2 per cent for all of the major banks.
RateCity analyst Peter Arnold said the cuts raised the risk that savers' funds would be "rolled over" into a product with a much lower rate when the deposit reached maturity.
"It's less competitive than it was six months ago," Mr Arnold said. "Savers need to make sure they don't rollover into a lower rate."
The Reserve Bank has also highlighted the trend, saying there was less competition for term deposit funds and this was helping to lower banks' cost of funding.
In response to the lower rates, households are turning away from term deposits, which surged in popularity after the global financial crisis savaged retirement savings.
The RBA are using bait rates to keep the consumption of debt products from collapsing.
But while the RBA controls the target rate it has less control over all the other rates out there. Notice that the rate on your credit card is a bit different to the target rate.
To help ensure that the target rate results in nice low mortgage rates – which are the bait rates that we are really talking about APRA helps out by standing by while our banks hand out hundred’s of billions in IOUs to wholesale market counterparties – who get their foreign currenct funds from a central bank printing press at ZIRP or from a lot of repressed developing world savers.
But of course this is not a cost free exercise as all of those FX transactions drive up the $AUS and help hollow out our economy with an exchange rate that does not reflect our largely dismal trade performance (dismal having regard to a historic mining boom)
So a breath taking stupid strategy is what is pushing down those local deposit rates.
Something worth remembering for all of those who think the solution to our problem is macro-prudential which amounts to wearing a chastity belt during schoolies week – frustrating and ultimately by passed with well handled bolt cutters.
Regulation wholesale borrowing for local mortgages is the solution.
Reducing that to zero over the next 5 years would be a great start.
A ZOWB Policy.
Zero Offshore Wholesale Borrowing For Residential Mortgages.
Banks are slicing interest rates on popular online savings accounts, as competition for deposits wanes and costs are pushed up by new regulations.
Major lenders including ANZ, Westpac, and HSBC have cut various rates on online saver products this month, continuing the recent trend of falling returns for people with cash in the bank.
The reductions of up to 20 basis points are part of a series of cuts to the interest rates paid on high-interest online savings accounts recently, with rates trimmed across more than 30 online saver products since December.
It comes as the industry competes less fiercely for deposits, and as new rules make it more costly for banks to offer certain types of deposit products.
Online savings accounts, which often pay customers "bonus" rates of interest and have minimal or no fees, have been a key tool used by banks in the battle to attract deposits.
However, new figures from RateCity show that more than 30 online deposit accounts from a wide group of lenders have cut interest rates since December.
A little under half of these cuts have occurred this month, when new liquidity standards took effect.
While rates are constantly being changed in response to competition, RateCity analyst Peter Arnold said this was significantly more changes than during earlier months last year.
The largest banks to reduce their rates were ANZ, Westpac, HSBC and Dutch online giant RaboDirect, alongside a range of small banks, credit unions and building societies.
Since December, ANZ has cut its "online saver" by 20 basis points, to 3.5 per cent, and its "progress saver" by 10 basis points to 3.41 per cent. Westpac cut 10 basis points off its "eSaver" and "reward saver" accounts this month, to 3.61 per cent and 3.4 per cent, respectively.
I've personally never seen the point of term deposits.
You get a rate that is a couple of percent above inflation, you pay tax on the entire nomimal profit, and you lose flexibility. Term deposits are fine for if you have nowehere else to put your money, but I think for most people it's still a very false investment.
Even in retirement, it seems smarter to me to put your money into something that generates a better return (e.g. blue chip shares, blue chip property, bonds, etc), and to plan to live off less than the total yield, using the difference to build up a buffer to see you through leaner times. Offset accounts (for those with debt), high interest online savings accounts, even ETFs seem like better options to me than TDs.
I've personally never seen the point of term deposits.
You get a rate that is a couple of percent above inflation, you pay tax on the entire nomimal profit, and you lose flexibility. Term deposits are fine for if you have nowehere else to put your money, but I think for most people it's still a very false investment.
Even in retirement, it seems smarter to me to put your money into something that generates a better return (e.g. blue chip shares, blue chip property, bonds, etc), and to plan to live off less than the total yield, using the difference to build up a buffer to see you through leaner times. Offset accounts (for those with debt), high interest online savings accounts, even ETFs seem like better options to me than TDs.
Just my opinion, no doubt others are different!
I agree Stinky. Cash at bank, whether it be term deps or online savers, only have limited uses (when you have no debt). Debt - then offset accounts.
Saving for a particular purpose with no other debt - eg home deposit, holiday, car etc. A buffer in retirement if living off "(e.g. blue chip shares, blue chip property, bonds, etc)". Somewhere to park sales proceeds if you're eating your capital in retirement.
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