Term deposits that offer bonus interest rates

The average interest rate on term deposits offered by the big four banks currently sits below 1.50% p.a., while across the market the average is well below 2.00% p.a. While there are a handful of term deposit products offering interest rates in excess of 2.00%, the hard truth is most term deposit rates are barely managing to keep up with inflation (currently 1.90%).

However, loyal term deposit customers may be able to get themselves a higher interest rate, thanks to something that’s commonly called a loyalty bonus.

The table below displays a collection of some of the highest term-deposit rates on the market for a one-year term. Not all of these deposits will have loyalty bonuses.

What is a term deposit loyalty bonus?

A term deposit loyalty bonus is a bonus little bit of interest you can get on top of the advertised term deposit rate, and they usually apply if you choose to roll over your term deposit or take out a new one with the same institution. These loyalty bonuses can vary but are most commonly an extra 0.10% p.a.

For example, let’s say you have a three-year term deposit at 2.00% p.a. At the end of that three year period, your provider decides to offer you the chance to ‘rollover’ your term deposit into a new one. If the specified bonus is 0.10%, you would now have a new 2.10% p.a. term deposit for another three years.

Of course, it doesn’t always work like this, and there are some flaws to term deposit bonuses, which we’ll cover later.

Who offers loyalty bonuses?

A small number of institutions offer loyalty bonuses on term deposits at the time of writing. There used to be more, but some of them have recently removed this bonus from their product suite. ING, for example, released a statement in May 2019 saying “the 0.10% p.a. loyalty bonus will no longer be available if the client renews (or rolls over) their term deposit”.

So loyalty bonuses are now more uncommon than common, and the big banks don’t offer them at the moment. Those that do are mostly smaller, online banks - here’s a snapshot of some we found:

• UBank: Bonus 0.10% p.a. for standard, green and SMSF deposits when you roll over your deposit at maturity
• Rabobank: Bonus 0.10% p.a. when you reinvest your term deposit before maturity
• Judobank: Bonus 0.10% p.a. on top of the standard rate if you rollover at maturity
• LCU: Bonus 0.10% p.a. on top of the standard rate at maturity

Some may be willing to offer you a bonus rate to keep you around even if it’s not on their website if you specifically ask for one, but this is no guarantee. And as we’ll discuss below, bonus interest rates aren’t always a good thing…

What’s the catch with bonus term deposit rates?

The standard interest rate might have changed

In the example we gave earlier, the 2.00% p.a. term deposit became 2.10% with a loyalty bonus. But the nature of interest rates in Australia means the term deposit’s interest rate staying the same for your entire term is quite unlikely to happen.

In 2019 alone there were three different cuts to the official cash rate, one of the key factors influencing term deposit interest rates. These cuts were equal to 75 basis points (0.75%), and many term deposit rates were cut by this amount or more.

A lot of term deposit products were closer to 3.00% p.a. a few years ago. If you had a three-year term deposit in 2017 at 3.00% p.a, and automatically rolled over with a bonus interest rate, it’s highly unlikely that interest rate would still be 3.00% p.a. Instead, it might be 1.75% p.a.

If you rolled over your term deposit to get a 0.10% bonus rate, you’d have an interest rate of 1.85% instead of 3.10% in this scenario, because it’s very unlikely the interest rate hasn’t changed in this time. The fixed nature of term deposits means you wouldn’t have noticed the change in interest rates while your term deposit is active, but the minute it matures, it will have a new interest rate if the bank has changed it.

By rolling over your term deposit to the same product to get a bonus rate, you could actually be worse off than you would be if you found a term deposit elsewhere with a higher interest rate.

Your money remains illiquid

Term deposits are a secure option - once the money is in there it’s extremely difficult to get out without incurring a penalty.

This can be beneficial for those who don’t want the temptation of withdrawing money that savings accounts allow, but accepting a bonus offer in exchange for continuing to lock away your money might be too much for some. If you initially had a three-year deposit and roll it over, then that’s an extra three-years you won’t be able to touch the money for, unless you specify a different term to the bank.

There are two things to consider when deciding whether you should roll over a term deposit:

• It might happen automatically: a lot of term deposits automatically rollover to a new term at maturity unless you tell your bank otherwise. Banks are required to give you a notice period for when this happens, but if you miss it you could find yourself stuck with that same term deposit but at a lower rate. Contact your bank prior to your term deposit’s expiry and read our article on automatic rollover here.
• There are penalties for withdrawing: If you do decide to renew a term deposit to get that sweet 0.10% bonus, but then halfway through need to withdraw, you can face early exit fees (or really more of an interest reduction) dependent on how much of your term has elapsed. See more information on term deposit early exit fees here.

The important thing is to read the terms and conditions of your term deposit before applying, so you know what you’re in for when you reach maturity.

The benefits of loyalty bonuses

The main advantage of a loyalty bonus on a term deposit is quite clearly the extra interest you get. If you get a ‘high-rate’ term deposit (say, 2.00% p.a.) for one year, and that interest rate is unchanged at the conclusion of the term, then that extra 0.10% p.a. could make that term deposit’s interest rate one of the highest on the market. Although with rates as low as they are at the time of writing, 0.10% for one year on a $10,000 investment is just $10 at maturity, so the benefits of doing so are minimal.

A loyalty bonus can also encourage you to continue to invest money in a safe and secure product. The returns on term deposits aren’t great at the moment, but as far as security goes it’s hard to go past a term deposit, with each bank (aka a registered authorised deposit-taking institution) offering a $250,000 guarantee courtesy of the government.

While other investment options such as equities risk your money going backwards, term deposits can sometimes be a risk-free way to earn something from your money, and a bit of bonus interest can help with this.

Savings.com.au’s two cents

Term deposit loyalty bonuses can be a good way to earn a little extra interest in a safe investment option, but the term deposit market is frequently changing, and it might just be that your term deposit’s rate has decreased while you’ve had it, and rolling over to a new one could see you hit with a sub-par rate.

This is why you should research and compare more term deposits before the conclusion of your term, so you know if there are better options out there. There’s no point in sticking your money away for an extended period if you’re getting a worse interest rate, as term deposits don’t really have much else going for them in the way of features.