Fixed term deposits offer unique benefits. You enjoy investment security and your funds are safe even if stock prices crash. That's because the rate is fixed for an agreed timeframe. You also enjoy higher rates of interest than traditional savings accounts. But the rates used by popular banks tend to vary from one period to another.
So how do you know what to expect when you approach your bank for this type of investment? Here are the key factors that usually determine the term deposit rates offered by banks.
Official Bank Rate
The bank rate is the interest rate that the central bank of a country charges commercial banks for overnight loans. This rate has direct impact on all other interest rates that banks offer to customers. For instance mortgage, car loans and term deposits are all influenced by the bank rate. Before your bank tells you the interest rate it will offer for a 10,000 dollar term deposit, it will use the current bank rate as a benchmark. Generally, the lower the bank rate, the higher the interest you will receive on your term deposit.
The Amount Invested
Commercial banks offer higher interest rates for larger investments. Typically, they specify a certain rate for a specific investment range. So you may have a rate for $1,000 to $10,000 and a higher rate for deposits that are higher than $10,000. Quite frequently, lenders allow you to negotiate the rate and other terms of the investment when you are investing large sums like $200,000 or more. When you invest a large amount of money in a fixed term deposit , you are providing funds for the bank to lend out to their customers and earn higher returns, so the bank will reward you with a higher interest rate.
Length of the Term Deposit
In most cases, the longer the term of the deposit, the better the interest rate. You will be offered a higher interest rate for leaving your deposit for 5 years than for leaving it for 2 years. This is simply because your bank wants you to keep the investment locked in for a long time. Longer term investments allow banks to have a guaranteed source of funds to serve clients who need loans.
Frequency of Interest Payment
Your interest rate is also affected by the time and frequency of interest payment. You can receive interest payment every month, once in a quarter or half-yearly. It is also possible to roll over your interest and receive it with your deposit at maturity. If you receive interest monthly, you have a higher earning potential. So your bank may offer you a slightly lower rate if you will be cashing out your interest payments every month.
Bank's Marketing Strategy
Your bank can offer you a high rate in order to gain an advantage over other competitors. To attract new customers, your bank can give more attractive rates. This will encourage you and many other customers to invest money in its fixed term deposit. The only way to know if your bank is giving you an attractive rate is to compare the rates offered by other competitors.
The Bank's Financial Health
When a bank needs to raise more local funds to finance its operations, it could raise interest rates on term deposits. For instance, if a bank does not want to continue depending on overseas funding, it may increase its interest rates on longer term deposits to get a safe and reliable source of funds. Also, when demand for home and auto loans increase, it may encourage investors to keep their funds for a longer period by offering a higher interest rate.
The Stock Market
When the stock market is bullish and the value of most stocks are rising, investors will prefer to put some of their money in the stock market. This will allow them to enjoy short term gains. Consequently, fewer investors will be interested in making long fixed term deposits that offer lower returns. At this time, some banks may offer slightly higher interest rates to encourage customers to put their funds in a more secure investment.
