Thinking of Going with a 5.10% Term Deposit for 5 Years, Easy but Smart Move?

borgainerz on 10/05/2024 - 13:46

I'm pretty confident betting the Interest Rates are going to stay put or start decreasing over the next 12 months, so I was thinking to put $30K I just got to a Judo Bank Term Deposit at 5.10% for 5 years.

I don't need this money for the next 5 years and am hesitating between term deposit at a fixed rate (judo currently doing 5.10%) before they start lowering the rates, or eventually starting an VAS / VGS Vanguarf ETF but I know nothing about it so it will require some time from me to learn the basics.

I think it is a good time (we're are close the the point of curve reversal regarding the interest rates)

Thanks for you thoughts.

Financial Term Deposit

Comments

  • foxmulder on 10/05/2024 - 13:51
    +15

    Ubank already doing it at 5.1 without locking it in, am I missing something?

    • boomramada on 10/05/2024 - 14:20
      +16

      Term Deposit

      • altomic on 10/05/2024 - 18:39
        +30

        LISA NEEDS BRACES!!

        • Mugsy on 11/05/2024 - 07:02
          +18

          DENTAL PLAN!

    • freefall101 on 10/05/2024 - 14:24
      +22

      Ubank will drop the rate if interest rates go down. A term deposit will keep earning 5.1% over the next 5 years regardless of rate changes.

      • WhyAmICommenting on 11/05/2024 - 14:37

        Username checks out? - unlikely with all this inflation :(

    • mrvaluepack on 11/05/2024 - 20:21
      +1

      My home loan bank was offering 2.5% variable a few years back while fixed was 3.5% for 5 years. Lesson learnt.

      • Poor Ass on 12/05/2024 - 18:37

        Haha yeah when the cash rate is near 0 no one is silly enough to do term deposits

      • Widget on 13/05/2024 - 08:38

        What lesson did you learn?

        • mrvaluepack on 13/05/2024 - 10:03

          To trust my gut instincts and not be greedy. Inflation was way above 4% and interest rates were still very low. Gut told me to lock in rates but the greedy part of me said 2.5% is cheaper than 3.5%.

  • KaTst3R on 10/05/2024 - 13:52
    +15

    If interest rates go down, the expectation is stock market will go up. So investing in VAS will make sense. ETFs are also liquid, you can exit in the secondary market anytime. It is your choice, but I am generally not comfortable locking up cash for such a long time.

    • NatoTomato on 10/05/2024 - 15:08
      -3

      Why is that the expectation? Why wouldn't more money flow into investment housing away from the stock market?

      • netjock on 10/05/2024 - 15:51

        Google discounted cash flow valuation model. Spolier: higher the rate lower the present valuation of shares due to cost of funding.

        • surg3on on 11/05/2024 - 23:08

          Rates don't go down in a vacuum. The factors can effect valuations plenty

      • KaTst3R on 10/05/2024 - 20:19
        +2

        Interest rates go down, cost of funding goes down. Means companies pay less interest and retain more cash flow which leads to higher company valuation. That is the most direct cause and effect.

        • NatoTomato on 13/05/2024 - 09:18

          I get this. But doesn't this isolate the stock market away from other markets? For example, mortgages become cheaper to hold, the housing market generally out performs the stock market in Australia, thus more big money moves from the stock market into the housing market?

          • KaTst3R on 13/05/2024 - 09:28
            +1

            @NatoTomato: You are thinking retail money (your mum and dad investors). Generally, institutional investors (fund managers, the ones with 100s mil and billions) dont buy into housing market.

    • surg3on on 11/05/2024 - 22:58
      +1

      The problem with ETFs compared to TDs is your initial investment is at risk. They will have to offer a better return to offset this

    • amsaini15 on 12/05/2024 - 20:40

      Why are people so interested in ETFs? Honest question, isn't divident yield too low and not much capital gain?

      • KaTst3R on 13/05/2024 - 00:29
        +1

        One word. Diversification. You are investing in a basket of stocks to replicate an index's performance rather than just one company or a few companies which has non systemic risk.

        • amsaini15 on 13/05/2024 - 07:58

          Agree with risk taking on single company stocks if compared with general stock market.
          I have to see how much divident yield it end up with after all the admin fees you pay to see its worth or play safe with banking, mining, woolies, Coles, telstra stocks.

          • KaTst3R on 13/05/2024 - 09:01

            @amsaini15: Some people just want to park their money in an ETF and forget about it. Over the long term, the market is expected grow (albeit slowly). But if you only have a few stocks in your portfolio, it is very concentrated and have to keep an eye on company specific news all the time. Different strategies for different people.

      • morebunnings on 13/05/2024 - 11:41

        When you take franking credits and the capital gains into account over the long term, within a few years your stocks are outperforming a term deposits.

        For example everyone's favorite VDHG has gone up 27% over the 6.5 years since it was made ($50/share to $63/share today), while also returning an average of 4.2% per year in dividends, which were franked at ~40%.

        If you had $100 invested in either, you'd be getting $5.10/year from the Term Deposit (TD), and $4.2 from the Stocks before tax. After tax though, its a lot closer. For this example, lets say you make $90k/year, then marginal tax rate is 24%, meaning the yearly after tax return is:

        TD income: $5.10 @ 24% tax rate = $1.22 tax = $3.88 in the hand / 3.88% after tax.
        Dividend income: $4.20, Tax on 60% @ 24% tax rate =$0.60 tax = $3.66 in the hand / 3.66% after tax.

        But over time the stocks go up. Since it was created 6.5 years ago, VDHG is now worth $127, and 4.2% of $127 is $5.33, so you're now getting the equivalent of 5.33% interest on your initial $100, plus its franked at around 40%, plus you get the extra $27 of capital gains (taxed at a 50% discount) when you sell the stocks.

        So your interest rate after 6.5 years would be:
        TD income: $5.10 @ 24% tax rate = $1.22 tax = $3.88 in the hand / 3.88% after tax
        Dividend income: $5.33, Tax on 60% @ 24% tax rate =$0.77 tax = $4.56 in the hand / 4.56% after tax
        Capital income if you sold your shares: $27, tax on 50% @ 24% tax rate = $3.24 = $23.76 in the hand ~= 3.6% after tax per year.

        So after 6.5 years you are making almost 20% more interest per year than the initial TD, and an average of 92% more per year in capital gains when you do sell.

        All these numbers assume you're not re-investing the dividend or interest payments each year.

        Obviously its not this simple. For the TD, interest rates move a lot, your money is locked up for 5 years, but you always get all your money back. For VDHG, dividends change, stocks go up and down, brokerage fees etc.

        But in the long term, stocks make sense. Emphasis on the long term.

  • onetwothreefour on 10/05/2024 - 13:53
    +24

    5 years is a really long time. I wouldn't want my money locked up for that amount of time.

    Any advice anyone gives you is basically just guessing but you can probably get better rates of return if invested.

    • Bozman on 11/05/2024 - 08:13
      +1

      Absolutely. For that time period, put it in something like an index fund. Easy, cheap, liquid and (likely) better returns.

  • Ocker on 10/05/2024 - 14:06
    +5

    I would support the idea of a term deposit for 5 years. IMHO there may be just one more rate hike before the year is finished, but I doubt it. From the end of 2024 onwards it is difficult to see why rates will not start to come off.
    Hence, 5.1% fixed for 5 years looks a pretty safe investment.

  • DingoBilly on 10/05/2024 - 14:15
    +3

    If the interest rates go down a lot it's a great idea!

    If the interest rates go up a lot it's a terrible idea!

    If you could invest elsewhere and make more money it's a terrible idea!

    If you could invest elsewhere and make less money it's a great idea!

    Which way will it go? Flip a coin, it'll be as accurate as anyone else on here.

    • boomramada on 10/05/2024 - 14:19
      +2

      If you need the money for an emergency within 5 years, it's a terrible idea!

      • mskeggs on 10/05/2024 - 15:56
        +2

        You can break a term deposit.

  • pharkurnell on 10/05/2024 - 14:22
    +4

    50% will tell you its a great idea
    50% will tell you its a dumb idea.

    • BOGOF on 10/05/2024 - 14:29
      +12

      And
      10% will tell you they are innumerate

      • Barbados Slim on 10/05/2024 - 23:21
        +10

        And 100% reason to remember the name

    • star-ggg on 10/05/2024 - 18:22
      +6

      So split the capital:

      50% in VAS
      50% in Fixed Interest

      • congo on 12/05/2024 - 20:16

        Why VAS? and not another index?

  • freefall101 on 10/05/2024 - 14:27
    +4

    The key to investments is your own situation. If you're young and it's your only investment, maybe take on a little more risk. If you're 5 years to retirement and just excess cash that you don't want to run any risks on, it's a good idea.

    • lunartemis on 12/05/2024 - 18:53
      +3

      If you are retiring in 5 years time, wouldnt it be better to put it in your superannuation for better return and less tax?

  • screensaver on 10/05/2024 - 14:42
    +1

    Judo was offering 5% on term deposits when the cash rate was really low. You may be able to find better if you shop around. Also check if interest is paid monthly and rolls over. I just checked their site and they do have a monthly option, Its 5%. This is likely better because you then start getting interest on interest

    • Ocker on 10/05/2024 - 15:05

      All the same end result whether interest is paid monthly for annually.
      5% compounded monthly is the same as 5.1% annually

      • screensaver on 10/05/2024 - 15:08

        how can that be when there is 12 months in a year?

        • Ocker on 10/05/2024 - 15:11

          Re-invest the monthly interest you received at 5% and you will see that at the end of 12 months you have derived total interest of $5.12, or a 5.12% return

      • jackofspade on 10/05/2024 - 17:23

        5.1% is paid at maturity ie. in 5 years time

        • screensaver on 10/05/2024 - 17:33

          yes but its credited annually, and interest is earned on that

          • Ocker on 10/05/2024 - 18:08

            @screensaver: So if you invest at 5% and the interest is paid monthly and then compounded each month, what is you annual rate of return?

          • jackofspade on 10/05/2024 - 18:13

            @screensaver: No, the interest rate for paid annually is 5.05% and monthly is 5%
            https://www.judo.bank/personal-term-deposit

            • screensaver on 10/05/2024 - 18:53

              @jackofspade: okay that calculates at 12,793, the monthly one is the winner. Actually the calculator only goes to one year compounding, so the result for 10000 on 5.10 is based on annual compounding, which the bank doesnt do, so you would have to check with them what their calculations are

  • Gdsamp on 10/05/2024 - 14:51
    +1

    I think we should all provide free financial advice without any disclaimer.

    • Kiro on 11/05/2024 - 12:28
      +3

      Bikies

  • Duckie2hh on 10/05/2024 - 15:09

    1+1=2

  • brendanm on 10/05/2024 - 15:23
    +6

    5 years at 5% sounds like crap.

    • El cheepo on 10/05/2024 - 16:23
      +1

      Better than a kick up the bum though.

      • brendanm on 11/05/2024 - 08:11
        +1

        Depends what you're into.

  • brad1-8tsi on 10/05/2024 - 15:37
    +1

    Tax will be payable.

    If it was my my kids I'd tell them to put $5k/month into VDHG. Tax still payable but only on the distribution not the unit price growth. Relatively stable but not as stable as a bank account

    • netjock on 10/05/2024 - 15:55
      +1

      Tax still payable but only on the distribution not the unit price growth

      Until they find it viable to tax unrealised capital gains (like they are doing with Super balances greater than $3m, unindexed)

      • brad1-8tsi on 11/05/2024 - 09:15

        I don't believe that change to super has gone through yet. A group of retired high court judges are disputing that change due to a double taxation issue.

        If you invest based on all the "what-ifs" then it's unlikely you will invest at all.

        • netjock on 11/05/2024 - 19:34

          If you invest based on all the "what-ifs" then it's unlikely you will invest at all.

          Actually not true.

          You just need to open up more options. I won't go into it but I'm in the tax planning space and there is so much in terms of possibilities especially if you are a business owner. If you are an employee you're in a bit of a pickle.

      • surg3on on 11/05/2024 - 23:09

        If I have $3m I'll deal with some tax

        • netjock on 12/05/2024 - 08:35
          +1

          Someone starting out work today will have $3m at retirement. Problem with the $3m super super tax is it isn't indexed so it is a time bomb waiting to happen.

          I will have $3m+ by retirement but it is split between super $1.6m - $2m and the rest will be in a business setup as an investment firm.

          I'm in finance services / tax planning.

          I've seen enough changes to super to know something is always in the works to make retirement more difficult.

          Think why they love exploding property prices? A $1m investment property with 3% yield will mean you get zero government pension. $500k property with 7% yield (like commercial property) will allow you to get a part pension.

          $1m share portfolio you can always sell $150k and spend it to get part pension but if it is an IP you can't sell unless you want to realise the capital gains and end up with a lot less.

          • brad1-8tsi on 12/05/2024 - 15:25

            @netjock: I;m not sure why you were negged as everything you wrote is true.

            • netjock on 13/05/2024 - 10:59

              @brad1-8tsi: Maybe they realised they screwed up and should have found me to pay for good advice. Who knows. Sometimes people have this hate relationship with money.

              Like you show them how to save $100 and they decided they want to neg you because they realised they voted in the party that is going to skewer their financial future.

              I am of the opinion ALP/LNP/Green. They are all useless. It happens when they are not held into account to balance the books. $1tn in gross debt. $300m was ALP hand over to LNP. Then you can say COVID debt is blah etc. But they keep on running a balance. It is like they think they get a tax deduction from someone and money fall out of the sky.

          • screensaver on 12/05/2024 - 15:48

            @netjock: My 71 year old mechanic told me he has an IP and cant get a pension, and cant sell the investment property, he said he would have had to sell it before 60 years old

            • netjock on 13/05/2024 - 10:56

              @screensaver: You can sell it. Pay the CGT on it. Then see what you've got left. Example

              He lives in a PPOR $3m (not part of means test)
              IP is worth say $2m he bought it for $300k. $1.7m profit. He pays tax on $850k at say mostly top marginal rate so he pays $400k tax. So he has $1.7-$0.4 = $1.3m. He just needs to blow $400k to get part pension. Just got on a big around the world holiday for 2 years, keep receipts in case centrelink wants to have a look.

              Unless he bought it before 1985 when CGT came in and he gets it all tax free which then he wouldn't have to really care and he has $800k to blow.

            • brad1-8tsi on 13/05/2024 - 13:28

              @screensaver: Your mechanic needs to find a better tax accountant. Of course he can sell his IP

    • kiitos on 16/05/2024 - 19:17

      Would you have to pay CGT on any unit price difference when you sell?

  • Lunarboogie on 10/05/2024 - 15:51

    Terrible idea. Nuff said.

  • netjock on 10/05/2024 - 15:53

    My PE fund went up 100%
    But my China fund went down 50%

    It depends on the amount invested I might have just broken even. (It is a true story)

    Who knows what missed opportunities you might have in the next 5 years. Only you would know whether it is good for you. At least you can sleep that in 5 years you'll get your capital back plus interest. Worst case Judo goes under and the government pays you back :)

  • Fergy1987 on 10/05/2024 - 16:07
    +3

    Bank of Melbourne offering 5.35% and then 5.15% on its Incentive Saver account - No point going with a term deposit at 5.1%

    Also if you want to invest in a VAS/VGS portfolio - why not just do it now with the money you "dont need"

    • borgainerz on 10/05/2024 - 16:43
      +1

      As far as I know the 5.35% rate is not locked for 5 years, they can lower it at anytime following RBA announce, correct me if I'm wrong.

      Yes I could invest in vas/vgs now, I started to read about it (i'm a newbie), but that requires quite some time to learn and decide who to go with, for a non-defined rate (probably between 5% and 8% looking at the past performances)

      • Wyn-Ryder on 11/05/2024 - 15:29
        +4

        There are 2 big differences though - Australian shares will have franked dividends (30% tax already paid) and you get a 50% discount on capital gains on the sale of shares after 12 months. Your 5.1% term deposit would be taxed at your full marginal rate the whole time.

        • R-Man on 12/05/2024 - 20:11

          @borgainerz this is your best answer

  • JIMB0 on 10/05/2024 - 17:08
    +4

    The main ones saying rates are going to start going down are mortgage holders and real estate agents trying to sell you a house.

  • 87percent on 10/05/2024 - 17:21

    Who doesn’t need money?

  • Dorge on 10/05/2024 - 18:03

    Might be a good plan, nothing i'd do personally . The Fed Watch tool predicts rates will be .5 to .75 lower in a years time.
    No one can predict 5 years.

    For a period of 5 years I'd only place less than 20% of my investments in one place for something that long.

  • payless69 on 10/05/2024 - 19:52
    +2

    Diversify!
    10k to Ing @ 5.5%
    10k some Betashares, use their app
    10k Vanguard or similar.
    not rocket science!

  • screensaver on 10/05/2024 - 20:08
    +3

    Heres a better deal. Rabobank pays 5.10 for 5 years with the interest compounding annually. Judos rate for compounding annually is 5.05, so you will make more here https://www.rabobank.com.au/rates/personal-rates/#c6cc6ab94d…. You will get back $38,471.12, and an extra .10 if you reinvest with Rabo

  • screensaver on 10/05/2024 - 23:31

    I checked the calculator for judo’s 5 year monthly compound at 5 % and it’s 38,500 so far the monthly is still the winner

    • BigBirdy on 11/05/2024 - 09:19
      +1

      Liberal Party press release, or heard it on Sky NewBS?

    • umyeahokay on 11/05/2024 - 13:30
      +2

      And of course, the LNP isn't the least bit interested in retaining power when they're in government, right?

    • payless69 on 12/05/2024 - 11:02
      -3

      Another thing to remember:

      You are posting to OzComrades….

    • Randolph Duke on 13/05/2024 - 01:31
      -1

      I think the last Coalition government showed who the drunken sailors were at the last election.

  • jrvb42 on 11/05/2024 - 09:46
    +2

    5 years is a reasonable period over which any volatility in the share market (which is basically VAS/VGS) should be smoothed out.
    Over that term you should expect consistent franked dividends of around 4% (so more than 5.1% grossed up).
    The only difference is capital at the end.
    Over a 5 year period, you would be pretty unlucky to get a reduction in capital (share price).
    My pick VAS. If you're nervous, buy it and don't look for 5 years. Enjoy the dividends and tax credits over that time. Check the share price 5 years from now. Pretty sure you'll be happy.

    • SlickMick on 11/05/2024 - 13:43
      +1

      I don't think you should minimise risk like that. Are you suggesting that growth is so good now that if there was a crash in year 5 he'd still be ahead?

      If I needed the cash in 5 years, I'm not so sure I'd be putting it on the stock market. If I didn't need it for 20 years, I'd probably be taking it out after 15 and not taking any chance on something bad happening in last 5 years.

  • arescarti42 on 11/05/2024 - 13:10
    +2

    A term deposit is low risk (you're guaranteed the return you're promised) but low reward. If the bank is willing to offer you 5.1% for 5 years, they're doing it because they think it will generate a good return for them.

    The rate they're willing to give you would be informed by their own professional economists and the wisdom of market pricing, which includes investment banks and hedge funds with hundreds of PHDs and supercomputers working around the clock to try and predict what interest rates will be in the future.

    If you're smarter than them, or know something they don't, then you'll be able to generate a better return. Otherwise any out performance is just luck. A broad market index fund like Vanguard has a higher expected return, but also higher risk.

  • witsa on 11/05/2024 - 18:13
    +3

    Not sure if anyone has mentioned it yet but it's rarely a smart move to put money in the bank long term.

    You get 5% interest - well 32.5% (or whatever your marginal tax rate) of that is going to the ATO. You have 3.5% left.

    Assuming average inflation (you might even assume more in this climate) of 2-3%, you have a profit of 0.5-1.5%.

    Your money gets eaten away by tax and inflation.

    Go for the ETFs. At least you'll get nice capital gains tax treatment and franking credits.

    • baker bob on 11/05/2024 - 19:57

      I find it interesting how few of the replies talk about tax and inflation. It really does give you an insight into how financially illeterate the average person is.

  • LFO on 11/05/2024 - 20:06
    +1

    As a fixed term investment is awful.

    If they offered 5.1% is because their accountants and actuaries and witches and frogs indicate they will make far more than 5.1%

    As said above, 5 years is a lot of time for lots of events.

    Go for a savings/investment bank account that pays that 5.1% as well. If or when they change then move/invest somewhere else..

    Again, if those in the business are offering 5.1% means they know they will win. They are not stupid. Nor naïve. Nor generous!!

    If really hesitant/unsure then buy gold bullion. For sure it will not lose value. Gains? Who knows … probably very little, but it is a (lazy) set & forget option.

  • yoquierotaco on 11/05/2024 - 21:19

    Index fund, choose one or two of the Vanguard and go with (if you want to do more research, you can find index with lower fees). Investing in index is higher risk, higher rewards compared to term deposit. If you have time, it’s worth it to learn the process of investing. Don't make it too complicated, pick a trading account like Pearler or Stake (or any other CHESS-sponsored), and just go through the process of buying shares. If it’s too scary to dump 30k at once, just set up a system where you buy $x every month. Just don’t do it too often with small amounts as the trading fees will start to add up.

    If you still don't believe investing is better, put half in index and half in term deposit. See what does better in 5 years and you can make your own decision (although 5 years is very short term, would recommend you keep it for longer). As other’s have said, you’re not really getting 5% after tax and inflation with term deposit.

    • jokingsplits on 12/05/2024 - 11:10
      +1

      Cmc has free brokerage to buy under 1000. Would be a good choice

  • GnarlyKnuckles on 12/05/2024 - 01:14
    -1

    This will be contentious, but personally I would plunge at least half of that 30k into an even split of BitCoin and Etherium for the 5 years; especially if you are not particularly 'badly off' and can afford to take a 15k 'risk.

    Have a look at what these two cryptos have increased by in the last 5 years, and how much various seasoned/wise economists/commerce experts are saying they are likely to increase by in the next 5 years.

    I suggest putting 15.0k into your 5.1% interest opportunity, $7.5k into BitCoin (make sure you keep it there for the full 5 years, don't 'panic' and pull it out half way if it starts to drop), and $7.5k into Etherium (again, make sure you keep it there for the full 5 years).

    I'm sure this advice will be ridiculed here, but I care not. Have a look at the data, and make your own decision. Five percent is not much, in the grand scheme of things.

    Best of luck :)

  • Antikythera on 12/05/2024 - 03:09

    i learnt my investment strategy from my parents.
    the problem was they were retired when i was 5.
    so I learned about term deposits.

    i wish now, that i had invested in stocks when i was much younger.
    I've only started doing so in the last few years.

    you spoke of learning how to VGS/ VAS.
    open an IBRK account
    https://www.ozbargain.com.au/deals/interactivebrokers.com.au
    transfer from bank to IBKR.

    buy one or the other market fund (personally i chose VDHG)
    add to it periodically. you can not time the market.
    some time you buy at a bargain / high, but over time it averages up.

    put 10% into something fun, that you are knowledgeable about perhaps, and watch the market price obsessively.
    i chose AMD because they were killing Intel with Ryzen and Epyc and getting closer to NVIDIA GPUs. then the AI boom took off and me with it.

  • Sinnerator on 12/05/2024 - 08:34
    -1

    banks never lock anything down in favour of the customer
    you are better off shorter terms and switching when a better deal pops up

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