Decent deposit returns possible
ANALYSIS: Getting a decent return on your money in the bank is hard these days.
Many haven’t even been trying, keeping their money in low and no interest accounts, instead of higher-interest term deposits. That means their money is available 24/7, but it also means inflation (7.3% and hopefully falling) is eroding the value of their money quickly.
All that cheap money has been great for bank profits. Depositors may not be happy, but shareholders (including people in KiwiSaver) are.
But there’s one group of depositors with a collective
$2.6 billion saved who are getting a decent return, even if they are gifting that return to somebody else.
Their money isn’t in term deposits. There’s not a single term deposit from a big bank that pays enough to ensure savers’ money is holding its value against inflation.
The paucity of deposit rates has all got a little embarrassing for banks as they announce yet another round of record massive profits, so large that the Prime Minister and Finance Minister have both felt forced to make tutting statements on them.
So embarrassing, in fact that their chief executives have to be careful not to make comments that get disgruntled depositors complaining.
Shayne Elliott, the chief executive of the trans-Tasman ANZ group, which owns ANZ New Zealand, made the comment in an analyst meeting following its record $2b after-tax profit that the bank didn’t have to offer the best deposit rates.
Worried households have been saving hard, so the banks haven’t had to compete hard to attract deposits.
To be fair to Elliott, he also said the bank paid ‘‘fair rates’’, but his words were taken as arrogant.
Then Dan Huggins, Bank of New Zealand’s (BNZ) chief executive, revealed households were keeping so much money in low and no-interest transaction accounts that it had swelled the bank’s margins, and helped it deliver a 7% rise in profits to a record $1.4b.
But hidden away in the depths of a shareholder presentation of the National Australia Bank was a glimmer of hope representing some people who are getting a decent return on the money they had deposited with the bank.
BNZ has a mortgage ‘‘offset’’ function on its TotalMoney accounts. Say a young couple have a mortgage of $500,000, and one of their parents has deposits of $100,000 at BNZ.
If that parent allows it, the bank will offset the deposit against the mortgage, and the interest on the young people’s home loan will be calculated as if it was $400,000. The parents will get no interest, and the TotalMoney account can only be offset against a floating rate home loan. The current rate of those loans is 7.25%. BNZ’s current highest term deposit rate was just 4.6% for a deposit locked up for five years.
Offsetting offers a good, intergenerational deal for some families, though it’s the kind of thing everyone involved in needs to think very carefully about before committing to, especially as it creates a level of transparency about everybody’s finances that is not entirely usual in families.
As a family, the return on that $100,000 beats the return the parents could get from a term deposit at the bank, and the kids get to pay their home loan off faster, and more cheaply.
Offsetting can also be used by people who like to have cash handy, despite having a mortgage in case they suffer a loss of income. At the end of September, there was about $2.6b in BNZ ‘‘offset’’ accounts. That was up from $2.3b in March 2021. In other words somewhere in the region of $300m more of deposits at BNZ are getting a decent return, albeit in a roundabout way, compared to 18 months previously.