13% only good in long run

ABSA’S SPECIAL OFFER: THE NOMINAL INTEREST RATE IS 10.05% IN COMPOUND TERMS

The fixed deposit space has become very competitive.

Absa’s special offer of 13% interest on fiveyear fixed deposits has caught the attention of many investors looking to park cash somewhere. But, as detailed by Moneyweb recently, the 13% quoted is the return in simple terms, with the interest reinvested for the full term.

In compound terms, the nominal interest rate is 10.05%.

This isn’t the first time a bank has quoted a high return in simple terms. Nedbank was called out in 2016 for offering 13% on its Green Savings Bonds.

Some banks, like African Bank, quote three different interest rates for fixed deposits: a monthly interest payout, an annual one and the equivalent interest rate for payout on maturity.

The fixed deposit space has become very competitive, with a number of banks launching special offers for longer periods.

It’s increasingly likely the Reserve Bank will increase interest rates from 2019.

On a 12-month basis, five banks quote rates over 8%, with another offering a rate above 8% for pensioners only.

For a 60-month term, Absa and African Bank quote double-digit nominal (monthly) interest rates.

As Moneyweb’s Patrick Cairns pointed out in 2015, nominal rates are “generally quoted if you intend taking the interest during the term. In other words if you want it paid to you monthly, quarterly or even annually. You will be given the effective rates if you intend to only take the interest on maturity.”

Effective rates

For comparison, the rates quoted by Treasury for its RSA Retail Savings Bonds as at October 15 are 8.25% (fixed) for two years, 8.75% for three and 9.25% for five years.

Some large banks, such as Nedbank and Standard Bank, quote a preferential interest rate for aren’t compounded. fixed deposit accounts opened and managed online (only). Pensioners also get preferential rates at most financial institutions.

Many banks don’t even offer a 60-month term for fixed deposits, steering investors to alternatives.

It is clear there are many options and an equally large amount of fine print.

Consult a financial advisor for investment advice.

A 60-month fixed deposit is possibly not the ideal vehicle, and would be dependent on an investor’s specific circumstances.

Hilton Tarrant works at YFM.