Term depositors getting billions less in interest payments

Term deposit holders have had to tighten their belts after a plunge in interest rates. Photo / 123RF

People with savings in term deposits are collectively earning billions of dollars less in interest annually than they were four years ago - forcing many to tighten their belts.

Reserve Bank figures show total household term deposits were $83.5 billion in March 2017 - just a tad lower than the $84.8 billion they hit in March this year.

But the amount of interest earned on that money is vastly different. In March 2017 the average six-month term deposit rate was 3.25 per cent which if calculated to an annualised figure across the deposits would have netted investors a potential $2.8 billion.

Fast forward four years and the average six-month term deposit is paying around 0.82 per cent, netting savers just $700 million a year in interest.

One term deposit holder who contacted the Herald after asking for the information from the Reserve Bank said he wanted to know the figures after seeing friends being hammered by the falling interest rates.

He said the people who were funding the banks through deposits were being hit hard while at the same time the banks were starting to report higher profits again.

Last month three out of the four major Australian owned banks reported half-year profits that were significantly improved on last year after the economy bounced back from Covid much faster than expected.

Bank profits have bounced back after taking an initial hit from Covid. Photos / NZME

ANZ's cash profit for the six months to March rose 42 per cent to $962m while Westpac New Zealand's cash profit was up 98 per cent to $583m and BNZ's rose 80 per cent to $660m.

Roy Reid, treasurer for Grey Power, said there were a lot of older people who had saved money in banks and they used the interest to supplement superannuation payments.

As the interest rates had fallen that has reduced the amount of extra spending money they might have.

Reid said that meant people were having to cut back on treats and restrict travel although Covid had impacted that in the last year.

"People weren't travelling as much, not going out as much as they used to."

Reid said the hardest part was that savers had no control over it.

"You can look for other investments. You might get a higher rate in a shaky investment but you are putting your money at risk by doing it."

Reid said a lot of older investors had lost money in the 1987 share market crash and were wary about investing in shares now.

Recently some banks had begun to offer higher term deposit rates but only for those prepared to lock their money in for longer periods.

In February ASB launched a five-year term deposit rate paying 1.75 per cent.

Reid said he had been told by a banker recently that depositors could get a higher rate of 1.2 per cent per annum but that meant locking in the money for two years.

But he said that could be risky because if the interest rates went up savers could be locking themselves out of the opportunity to take advantage of an increased interest rate in the future.

He said Grey Power had spoken to the Government about the low interest rate issue and been to meet with the Reserve Bank three times about it, most recently in March.

"We just made the point that interest rates are affecting older people."

While they were met with sympathy Reid said they were told it was up to the banks to set interest rates.

"I guess we have just got to accept it to a limited extent but you look at the bank's balance sheets, they are pretty damn healthy."

He believed banks could be giving more to their deposit holders but said they also had a duty to look after their shareholders.

But he said the consequence of lower rates was that people were eating into their capital rather than living off the interest which meant they would not have those savings for a rainy day which could set people up for harder times in the future.

Stephanie Clare, chief executive of Age Concern, said the rate drop was a big step for some who had depended on the higher interest rates for the extras of life.

But she believed many had now adjusted to the rates.

"I do know that our seniors have actually adjusted to the low interest rates and term deposits."

Clare said there was an initial shock when Covid hit last year and the rates were cut lower with people questioning what to do.

Then came an understanding that it wasn't just one bank but all banks that were paying lower interest rates and shopping around didn't give you any better, she said.

"Life was changing."

Clare said some older people who still had a mortgage had also benefited from lower mortgage rates.

"There are a number of older people that still have mortgages and are able to service a mortgage depending on if they are working."

She said the advice it gave to people was to be clear on what they were borrowing or saving and to get budgeting help if they needed it by tightening up their belts - the same as what many New Zealanders had to do in the last year.

Clare would not comment on whether the banks could pay more on term deposits. "My advice is to seniors not to banks."

Reserve Bank says it is up to commercial banks to set their interest rates. Photo / NZME

The Reserve Bank was vocal last year about banks needing to bring their mortgage rates down but has had much less to say about deposit rates.

A spokesman for the Reserve Bank said the broad intent of monetary policy in recent times had been to provide support to the economy in response to the economic impact of Covid by lowering interest rates.

"The Reserve Bank primarily influences wholesale interest rates in the economy. Retail interest rates such as mortgage rates and term deposit rates are set at a margin above these wholesale rates."

He said it was up to banks to make commercial decisions on how much interest they pay on term deposits, in a competitive market.

"The Reserve Bank has observed the recent rise in some longer-term deposit rates, but the RB does not determine those rates."

"Our preference is to maintain the current levels of stimulus for the economy by keeping interest rates low, with the official cash rate held at 0.25 per cent."

Last month the Reserve Bank provided forward guidance on interest rates indicating the official cash rate could start rising from the second half of 2022.