Great Term Deposit Rates…… or maybe not so great

With interest rates at a 30 year low, everyone is looking for a better rate than their bank is offering. If you google ‘great Term Deposit rates’, you normally just get the big 4 Australian banks and some smaller banks (Bendigo/Bank of Qld/Building societies). A few scrolls of the page and nothing much changes.

Term Deposits areas are bit like milk – once out of the carton, it’s all the same in a glass. All the majors and smaller banks at the moment offer around 3.5% to 4.0% depending on the term. Not much of a range, which is normal.

So if someone is at present offering more – say, 5% or even 6% – why?

Simply, they are not Term Deposits.

If you google ‘great investment rates’, you get a whole different series of offers, especially in the paid ads that appear on Google on the right hand side. Offers from organisations with names that conjure solidity, old world or an international presence. For example, Bartholomew Capital, Monarch Finance, Estate Wealth Corporation or Provincial Global Pacific (not real firms that we are aware of, but see the similarity of names for yourself).

In this Google-advertised area, I saw offers such as ‘24% over 12 years’……and ‘12% guaranteed’ ….and another with the phrase ‘highly rated 9%’. It goes on.

When bank (read Term Deposit) rates are low, these high returns are advertised and attract disgruntled Term Deposit investors.

Let’s get back to basics. What is a Term Deposit?

– Offered by a bank, building society or a credit union
– Short term in nature – from 3 months to 5 years
– Interest rate does not alter after investing – capital returned at maturity
– If placed with an ADI*, up to $250,000 is guaranteed by the Australian Government

*ADI – Australian Deposit Institution. The Australian Government has guaranteed deposits up to $250,000 in Authorised Deposit-taking Institutions (ADIs) such as your bank, building society or credit union. This means that this money is guaranteed if anything happens to the ADI.

The last point is important for investors with a low risk tolerance. The reason the Australian Government can offer that guarantee is because ADIs are regulated by the Australian Government. In addition, these institutions are covered under The Code of Banking Practice and the Mutual Banking Code of Practice and, of course, adhere to Australian Government regulations.

If Monarch Finance is offering 12% guaranteed, what is it then? It could be:

– Unlisted debentures
– Unsecured notes
– Unlisted mortgage securities
– Mezzanine investments

The guarantee is by Monarch. If Monarch has no assets due to insolvency, the guarantee is worthless.

Investing in these is more risky that Term Deposits issued by a bank, building society or credit union. In specific circumstances the above may be suitable for an investor. But always seek independent advice as to whether they are right for you.

 

For more information contact us or visit https://www.moneysmart.gov.au/investing/investments-paying-interest/term-deposits

List of ADIs at http://www.apra.gov.au/adi/pages/adilist.aspx

 

Glossary

Term Deposit

An account with a financial institution where money is deposited for a set period of time. The interest rate is usually fixed for the term of the deposit and is generally higher than a transaction account but not always higher than some other at-call high interest savings accounts. Also known as a fixed deposit.

Debenture

A medium to long-term investment issued by a company. You are lending money to the company. In return you will receive a regular and fixed interest amount for the term of the investment. The invested funds (principal) are repaid at the end of the term (maturity).

Mortgage Security

A mortgage-backed security is a type of asset-backed security that is secured by a mortgage, or more commonly a collection of sometimes hundreds of mortgages.

Unsecured Loan/Note

A loan for which no asset has been used as security. The interest rate is usually higher than for a secured loan as there is a higher risk to the lender of not getting their money back.

Unlisted

A financial arrangement not listed on a public market (eg ASX) and thus is not publicly traded allowing transparency. It can be a closed market. Market or redemption prices are only available from the Issuer or firm handling the Administration of the arrangement.

Mezzanine Finance

A hybrid of debt and equity financing that is typically used to finance the expansion of existing companies or build development projects. It is usually debt capital that gives the lender the right to convert to an ownership or equity interest in the company if the loan is not paid back in time and in full. This type of investment tends to be high risk and suitable only for sophisticated investors.

 

“This document or website contains general advice only. You need to consider with your financial planner, your investment objectives, financial situation and your particular needs prior to making an investment decision. Charter Financial Planning Limited and its authorised representatives do not accept any liability for any errors or omissions of information supplied in this document except for liability under statute which cannot be excluded.”

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