September 09, 2025

Term Deposits: A Useful Tool, But Not an Investment Strategy

Term Deposits: A Useful Tool, But Not an Investment Strategy

Introduction

Us Kiwi’s love term deposits. But are they truly an investment, or just a favour to the bank? I recently was asked what a couple should do with a term deposit that was about to rollover. I paused and thought about what I wanted to say; however instead of filling the room with my thoughts I asked them what they thought of term deposits. They mentioned about them being safe, having a guaranteed return and being able to set and forget about them. All true of which is true and does best describe with a term deposit does, but is it the best option?

Why banks love TDs

If New Zealanders don’t have their capital working for them in their first love, the property market, then they are bound to have it secured in a Term deposit with their favourite bank. But do we class this as an investment?

Term deposits are a banks best friend. They provide a stable, predict source of funding for them to earn their money, lending it out to cash needy New Zealanders. Banks can lock you in for a period at a rate partially determined by the Reserve bank and partially by their demand needs. This means lenders can get funding year-round with bundles of money being locked away from investors until maturity is due.

The investors capital is partially working for them and mostly working for the bank.

As the couple I spoke with mentioned there are reasons why investors prefer term deposits. Being locked away has its benefits, can’t touch it until maturity (unless they want a break fee that will sting their return), they have a predictable return on capital, and they are considered safe sitting with an individual bank.

The catch

Let’s look at the return aspect of term deposits. The nominal return is shown in plain sight, banks stat it everyday and it will be on the contract note when you agree to the terms. But something investors need to consider is the rate of inflation.

This cringeworthy word in the investment universe erodes capital in plain sight and you can’t do anything about it. Its inevitable in this day in age and can be managed at a macro level through strategies such as monetary policy. This purchasing power erosion means we need to look at the inflation adjusted figures. Financial experts do this everyday whether projecting financial outcomes or showcasing returns. By removing inflation from term deposit rates, we can see the true return on capital.

Example in today’s terms:

Heartland 1-Year Term Deposit 3.8 % (highest currently in the market)

Current inflation rate 2.7%

Real Return of 1-Year Term Deposit 1.1%

We can see how inflation diminishes the return of a term deposit over time in today’s world. But what about high inflation in recent times? This figure peaked at 7.3% in the September 2022. During September 2022 the average 1-year Term Deposit rate was 4.0%. This leaves a negative real return of 3.3%. If your money was sitting in a Term Deposit during this time you would have lost 3.3% of your purchasing power. Yes, it is better than not sitting in a Term Deposit where it would have lost 7.3%.

This is why we need to seek advice and make sure it is the best option for the goal we are trying to achieve with the funds.

The below chart from Dimensional shows the S&P/NZX Bank Bills 90-Day Index – Inflation adjusted (a common index for interest baring securities). In laymen terms, the return you would expect on a short-term interest rate product. By going down the column for the start date and across the row for the end date we can see the annualised return for that period. In recent times with the high inflation rate the numbers have been very red (negative real returns). Interestingly the 10-year period ending in 2024 had a net zero return, meaning money invested in this index would have the same purchasing power as 10-years ago.

Consensus

Term deposits have their place, they can be very influential in a wealth plan for clients. Often the best use is to have them in your cashflow for future spending purposes, for example if the funds are earmarked for a not so distance home purchase. This term deposit plan will provide the investor confidence and peace of mind with the known return on capital. However, term deposits are rarely the best tool for storing or building wealth in the long-run.

Real wealth requires growth that keeps pace with inflation, tax, and life’s changing opportunities. That’s where strategic portfolios, intentional investing and ongoing advice play their role. The key is to match the right tool to the right purpose, letting your money serve your intentions, not just the banks.

References and other information:

Interest rates - Term deposits & savings | Heartland Bank. (n.d.). Heartland Bank Website. https://www.heartland.co.nz/savings-and-deposits/interest-rates

RBNZ. (21 July 2025). What is inflation? Retrieved from Reserve Bank of New Zealand: https://www.rbnz.govt.nz/monetary-policy/about-monetary-policy/inflation

Term deposit rates. (n.d.). interest.co.nz. https://www.interest.co.nz/chart/investing/term-deposit-rates

Chart from Dimensional Fund Advisers – Need permission to cite the graph on an article.