Need to know
- Sticking customers with a miniscule interest rate is standard practice for banks when you let your term deposit roll over without taking action
- Older people and those not engaged with their finances are particularly vulnerable to the term deposit rollover trap
- We highlight rock bottom rates from major banks such as 0.30% on a 24-month term deposit of $30,000
Did you know that if you have a term deposit and you let it roll over into a new term without taking any action, the bank can drastically cut the interest you earn on it?
It seems like a dirty trick, but banks will often do it if you don't get in touch to say you want the same rate you'd been getting (or a better one).
Shouldn't the bank assume you'd want the best rate available?
Term deposits come in many shapes and sizes, and there are different terms and conditions around what happens when they mature.
Sticking customers with a miniscule interest rate appears to be standard procedure
Yet, in many cases, sticking customers with a miniscule interest rate appears to be standard procedure when you let it roll over into a new term.
Your money is then locked away at that rate for the length of the term – unless you're willing to pay a penalty to liberate it.
Sure, the bank has to notify you when your term deposit is about to mature and give you a chance to intervene, but the communication might be easy to overlook for some people, especially those who don't do internet banking or anyone who maintains a distant relationship to their finances.
Rolling it over at 0.15%
This is exactly what had been happening to Charlie's sister, 77, who normally let her 12-month term deposit with ANZ bank roll over into a new 12-month term.
This time, with her brother's help, she finally noticed that the 'indicative rate' the deposit was rolling over into was a paltry 0.15%, as it had been for the previous 12 months.
This meant her $24,335 term deposit had earned just $36 over that time.
It seems open to abuse by ANZ that the indicative rate is not closer to the advertised rate
Around the time it was due to mature in early January this year, 12-month rates for other ANZ term deposit products were advertised at 4.90%.
At that rate, the deposit would have earned about $1122.
"It seems open to abuse by ANZ that the indicative rate is not closer to the advertised rate," Charlies tells CHOICE.
"The consequence is that my sister has withdrawn all term deposits from ANZ and placed them with another bank."
Older customers who don't bank online are particularly vulnerable to the term deposit rollover trap.
The high cost of disengagement
Melinda's mum Sally may have made the same move if she were engaged with her finances and put much thought into getting the best interest rates.
But she's 88 and, after losing her husband eight years ago, has struggled with depression and dementia.
Sally lives alone and staying on top of her banking is not really a priority. She's not connected to the internet.
St.George Bank sent Sally a letter each time her term deposit was about to mature and informed her she wasn't on the best rate available, but she didn't really look at the letters.
Had this, or a comparable interest rate been applied in recent years, Sally, who's a pensioner, would have earned thousands of dollars more
So the bank just rolled Sally's term deposits over into the same low rates. Some of the rates Sally received on her term deposits include:
- 0.30% on a 24-month term deposit of $30,000
- 0.25% on a 304-days term deposit of $41,245
- 1.05% on a 60-month deposit of $33,729.
- 0.75% on a 12-month term deposit of $25,000
The current term deposit rate on offer from St.George for these amounts and terms is around 4.05%.
Had this or a comparable interest rate been applied in recent years, Sally, who's a pensioner, would have earned thousands of dollars more.
Do banks have a responsibility to do better?
The banking code of practice says banks are committed to 'taking extra care' with vulnerable customers, but term deposits continuously rolling over into rock bottom rates for a customer in her late 80s apparently didn't set off any alarms at St.George Bank.
Patricia Sparrow, chief executive of the Council on the Ageing Australia (COTA), says banks "have an ethical responsibility to act in the best interest of all their customers, especially older and vulnerable Australians. That means doing everything possible to ensure the best outcome for the customer".
This is one of many examples that show the need for new fairness laws that ban unfair business practices as soon as possible
CHOICE campaigns and policy adviser Yelena Nam
"Due to gaps in the law, it's not illegal for banks to roll your term deposit over into a new term with a lower rate, but it is unfair," says CHOICE campaigns and policy adviser Yelena Nam.
"This is one of many examples that show the need for new fairness laws that ban unfair business practices as soon as possible. These laws could stop companies from penalising customers for their loyalty."
Term deposit trap has a long history
Reasonable term deposit rates turning into abysmal ones is a longstanding issue.
The Australian Securities and Investments Commission (ASIC) put out a report in 2010 that showed how banks dud customers who let term deposits roll over.
The report revealed that nearly half of the $16.63 billion in term deposit savings ($7.88 billion) across four financial institutions rolled over from high to low interest rates, meaning many customers failed to take action or didn't notice when their maturity notices arrived.
A St.George Bank spokesperson didn't respond to our question about why the bank doesn't roll term deposits over into the best rate available, especially in the case of older customers.
[The banking code of practice] sets out a clear commitment that banks will train their staff to treat diverse and vulnerable customers with sensitivity, respect and compassion
ABA spokesperson
"We notify customers in advance of their term deposit maturing and on the maturity date. We also let customers know they can make multiple changes to their term deposit for up to 14 days post maturity before it rolls over on the same term," the spokesperson says.
The Australian Banking Association (ABA), which administers the code of practice, also ignored our main question, but they told us the code "sets out a clear commitment that banks will train their staff to treat diverse and vulnerable customers with sensitivity, respect and compassion".
A new code could help
An updated code that is currently under review by ASIC includes "a new definition of a vulnerable customer, recognising anyone can become vulnerable at any time in their life, depending on circumstances," the spokesperson says.
Patricia Sparrow from COTA says the code should "identify people who only use over the counter banking services, as well as those who don't log on to digital services like the apps and online banking, as a cohort that requires more support".
But as for interest rates dropping off a cliff when the term deposit rolls over, that's all in the fine print, the ABA says.
"In the absence of any further instruction from the customer the bank will act in accordance with the terms and conditions."
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