Bank term deposits might not earn much, but sometimes they’re the best option

They’re boring and they pay low interest. But bank term deposits are probably the best place to park money for a few months — or even a year or so. Anywhere else could be too risky.

A reader we’ll call Jackie writes, “I am currently selling my house and anticipate I will have around $500,000 after I pay off my existing mortgage. I aim to buy again but possibly not in the next 12 months. Any suggestions for short-term investment?

“I want to safeguard my nestegg until I need it for another property.”

One possibility for Jackie’s money is a non-bank term deposit offered by a finance company.

They pay higher interest than banks, which is of course appealing.

But whenever someone offers you a higher return, think about why they are doing that. They’re borrowing your money, and will surely want to pay as little interest as possible. The only reason they offer more than the banks is because they are riskier, so savvy people will lend to them only if they get a higher return.

I’m not saying every finance company is high-risk. They are more regulated than when several companies collapsed during and after the 2007–08 global financial crisis. Still, I don’t invest in them.

Other possibilities are managed funds.

These include KiwiSaver funds, but obviously they are not suitable for short-term investing unless you’re over 65. But most KiwiSaver providers also offer similar funds that you can withdraw from whenever you like.

We should straight away rule out all but the lowest-risk defensive funds. Higher-risk funds — such as balanced and growth funds — bring in higher long-term returns, but they’re volatile. Jackie doesn’t want her half million dollars to diminish just when she’s about to buy a home.

But defensive funds are certainly an option. Their value rarely dips, and they might bring in a slightly higher return than term deposits. But by the time you pay fees, that might not be the case. And they’re a bit more complicated.

Bank term deposits look like the winner!

But don’t just accept what your bank offers. Check other rates in the Savings section of interest.co.nz. If you would rather stick with your bank, tell them if you can do better elsewhere and they might match the higher rate.

What term should Jackie go for? Usually, longer terms pay higher interest. But it doesn’t always amount to much.

For example, you might get 2% on a 3-month deposit or 2.3% on a 6-month deposit. On Jackie’s $500,000, over six months:

  • With two 3-month deposits, she would get a total of $5,012.50 interest — assuming she adds the first lot of interest to her second deposit. After tax at 30%, she has $3,508.75.
  • With one 6-month deposit, she would get $5,750. After tax, that would be $4,025. That’s about $500 more.

If Jackie is sure she won’t buy a new home within six months, clearly she should choose the second option. But what if she chances upon the perfect home sooner than expected? She might lose interest if she withdraws her money early. The choice depends on circumstances.

One final point: If Jackie has taxable income of more than $48,000, she should consider banks’ “term PIEs” on interest.co.nz. Their top tax rate is 28%, compared with 30% or 33% on other income.

Ask Mary

Have a question or concern about saving or investing for Mary? Email [email protected], subject Money. Letters cannot be answered personally. If your topic is chosen you will receive a copy of Mary’s book, Rich Enough? A Laid-Back Guide for Every Kiwi.

No paywalls or ads — just generous people like you. All Kiwis deserve accurate, unbiased financial guidance. So let’s keep it free. Can you help? Every bit makes a difference.

This column is supported by the Financial Markets Authority to encourage women to take an interest in KiwiSaver and investing. Visit fma.govt.nz for more information. Mary’s views do not necessarily reflect those of the FMA.

Mary Holm is a freelance journalist, a director of Financial Services Complaints Ltd (FSCL), a seminar presenter and a bestselling author on personal finance. From 2011 to 2019 she was a founding director of the Financial Markets Authority. Her opinions are personal, and do not reflect the position of any organisation in which she holds office. Mary’s advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it.