I Bought a Long-Term CD and Rates Have Moved Higher, What Should I Do?

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As interest rates have moved up on longer-term CDs, many have found themselves in a quandary over what to do about longer-term CDs that they may have purchased over the last couple of years and that are now yielding less than the going rate.

In fact, I myself find myself in such a position, having purchased a 5-year CD from a major online back 2 years ago at 2.25%.   With BestCashCow now showing 3-year CD rates at 2.60% and with the ability to get out of the CD with a 6-month early withdrawal penalty, I can already cover my losses from the penalty by rolling into a higher yielding CD.

With rates points to rise still further, this strategy locks into one early withdrawal penalty and runs a high risk of a second one.   It accomplishes little other than a psychological benefit of allowing me to feel like I am still getting the best CD rate.

Since rates may rise further between now and the end of the year, and still further into next year, I have chosen to adopt a separate strategy.   My strategy involves resolving, as I have, that I will ultimately need or want to terminate the CD that is earning 2.25% before the end of its term three years from now.   That will cost me 6 months of interest (or 1.25% the initial CD price) whenever I pull the trigger.    But, rather than do this now and risk getting another CD which may quickly wind up paying below the best rates, I have decided to treat this outstanding CD as if it were cash or a short term CD.  Since 2.25% is still better than what I can get in a savings or a one-year CD, I will hold the CD for now.

When savings and short term CD rates have moved meaningfully above 2.25%, I will reconsider my position (unless there is only a very short period left of the CD at that time).

This situation underscores the importance of looking for CDs with reasonable early-withdrawal penalties.   We consider 3 months of interest to be a reasonable penalty on a 1-year CD and 6 months of interest to be a reasonable penalty on a CD longer than 1 year.   Also, as we noted in this article, the bank or credit union’s terms may grant it discretion whether to honor your early withdrawal request.   You can lessen the risk of an early withdrawal being denied by only opening CDs with larger, recognized online banks.


The Return of the 6-Month CD

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I am only in my forties, but I have been told by my seniors of an era of largely stable interest rates when 6-month CDs offered depositors the ability to earn a premium over savings or money market rates, without the burden of locking up their money for as long as a year.

Of course, it makes sense in any environment where interest rates are stable or increasing that depositors would be rewarded, albeit marginally, for locking up their money for 182 or 183 days.   However, in the post-2008 period, of course, depositors have not seen 6-month CDs that offer a premium over savings rates.   Even over the last several years when savings and money market rates have been slowing moving up as the Federal Reserve raised the Fed Funds rate from zero to 1.25%, the best 6-month CD rates have been largely below the best savings rates. 

With consensus estimates that the Federal Reserve is poised to raise interest rates 3 or 4 times in 2018, last week we finally saw the emergence of 6-month rates that are better than the best savings rates.  

As of this writing, the best online savings rate is 1.80% and the best 6-month CD is 1.95% APY.   (Local rates where you live may be higher.  Check local bank savings rates here, and local credit union savings rates here.   See local bank 6-month CD rates here and local credit union 6-month CD rates here).

We don’t believe that a 15 basis point premium over savings is worth chasing.  Over 6 months, it amounts to 7.5 basis points which after tax is about 4 basis points.  In other words, you are looking at a gain of $100 on $250,000.

Nonetheless, for many people who would otherwise consider short-term CDs, but have shied away from locking up their money for periods of 1 year or longer, the return of the 6-month CD is an interesting development. 


EverBank’s 3-Year Petrol Currency Marketsafe CD: A Different View on A Dirty Pool

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We’ve written before, multiple times, about EverBank’s currency CD program.   We addressed these products most recently here, having first addressed them here.  

The EverBank 3-Year Petrol Currency Marketsafe CD - like the earlier EverBank products on which it is based - is not a CDs at all.   A CD is a time deposit guaranteed to compensate the depositor with a certain rate of return as consideration for keeping their money with the issuing bank for a certain period of time.  EverBank's so-called CD is an investment product designed to exploit unsuspecting people without any currency knowledge or wherewithal and to get them into a product that is more likely than not to deliver no return whatsoever over a long period of time.

When EverBank today announced this 3-Year Petrol Currency Marketsafe CD today, they produce a page with all sorts of wishy-washy rationale on why customers should be desperate to invest in a vague product involving the Canadian dollar, the Mexican peso, the Russian ruble and the Brazilian real as a way to take advantage of higher oil prices.   Beyond the wishy-washy rationale, the page and the video on the page represent a prima facie violation of the Securities and Exchange Act of 1933.

So, let’s make this simple: 

  • If you believe oil prices are going to go up, you can buy Exxon, Chevron, or another US oil company that produces a dividend. 
  • If you want to take on more risk associated with Canada, Mexico or Brazil, you can buy Canadian oil trusts, Pemex or Petrobras.   
  • If you must own Canadian dollars, Mexican pesos or Brazilian real, you can open an interest bearing foreign currency account with Citibank.
  • If you must own Russian rubles, you should get your head examined.  
  • If you want your money to be tied up with EverBank for the next three years, you should check BestCashCow’s 3-year CD rates and see how EverBank compares with others. 

Under no circumstances should you invest in EverBank's 3-Year Petrol Currency Marketsafe CD.


As Certificate of Deposit Rates Rise, So Too Does their Risk

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For many years, Certificates of Deposits (CDs) have provided a relatively safe way for investors to earn a little more than the best savings rates.   For this reason, BestCashCow has always recommended that people take a look at short term CDs to protect themselves and enhance their returns in not only a falling interest rate environment, but also a stable interest rate environment.

In a rising interest rate environment – or one where the market is pricing in a rise in interest rates – CDs can rise more quickly than savings rates and therefore appear more interesting, especially when people have become accustomed to seeing low interest rates for some time.

In fact, if you look at the chart on this page entitled “Spread Between Savings Rates and 1 Year CDs” you will see that the premium offered on a 1-year CD over savings rates is now approaching 50 basis points (its widest point in a decade).

It would seem that one-year CDs are becoming more attractive. However, it is important to understand that widening premiums represent an expectation of much higher savings rates in the coming year.  The premium is widening to provide additional compensation to the purchaser for locking up their money for a full year.

But is it enough?  

This is a question for each individual to decide based on their own liquidity needs and expectations for interest rates over the coming year, but we would suggest that it might not be.  Last year, at this time, the highest online CD rates were at 1.35%.   I was a purchaser and quickly had buyer’s remorse as savings rates rose.

An additional risk to CDs as they rise that many people do not consider is the rise in early withdrawal fees.  

Early withdrawal fees, often called early termination fees, are the fees that you as a consumer need to pay in order to break a CD early should you require your capital before the end of the CD term.  These fees are always expressed in terms of months of interest on the CD and, if you withdraw early in the term of the CD, you may loose principal.  We also caution that the issuing bank virtually always retains the right to deny your right to early withdrawal (while most banks will not exercise this clause, you learn more about this risk here).

It has been BestCashCow’s opinion that a fair early withdrawal fee on a 1-year CD is 3 months’ interest and a fair early withdrawal fee on a CD longer than 1-year is 6 months’.

Without considering the risk of longer term CDs and withdrawal fees in a rising interest rate environment, let’s again just look at 1-year CDs.  A one-year CD purchased a year ago at 1.35% with a 3 month early withdrawal fee would have cost 0.3375% to exit.  On a $200,000 deposit, you would have had to pay $675 should rates rise or should you otherwise need to withdraw month early.  That same $200,000 invested in a 2% CD is going to cost you 0.50% or $1,000 to terminate early.  The risk associated with the greater penalty combined with the risk of higher interest rates might give you more pause in 2018.

So we are cautious about not just longer term CDs, but also about short term CDs here.   Anyone who is hesitant about locking in should take a look at the best online savings rates first.

Want to learn more about CDs?   We think a good starting point is with our 65 Questions to Ask Before Buying a CD.


A Five-Year Certificate of Deposit Paying 3% in 2018

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As we begin 2018, 5-year Certificates of Deposit offered nationally and online don't yet earn 3%.  Depending on where you live, you may however find a 5-year CD in your city offered by a local bank that pays 3%.  Or, you may find a 5-year time deposit (which is the credit union terminology for a 5-year CD) offered by a local credit union that pays over 3%. 

Interest rates have moved dramatically higher in 2017.  When we began 2017, it was difficult to find a nationally offered 5-year CD at 2%.

With the Federal Reserve under Jay Powell predicted to move the Fed funds rate at least 3 times in 2018, BestCashCow predicts that we will see 5-year CDs higher than 3% in 2018.  Therefore, we would suggest that you refrain from buying a 5-year CD at least until you see a 3-handle. 

And, when you do see 3% APY on a 5-year CD, you should be aware that we may be poised to move still higher from there.  For that reason, we also recommend that you look for CDs with early termination fees (or penalties) of 6 months’ interest or less.    Many of the 5-year CD rates that are listed in our online CD table have more onerous penalties for early termination.  You should also be aware that the issuing bank may retain the right not to honor an early termination request.

As we start 2018, savings accounts and one-year CDs are a safer bet.  You may also want to check CD specials online and locally.

Happy New Year from all of the folks at BestCashCow.


GiftsforBanking.com: Interesting, but not for Everyone

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There are a ton of ads floating across the internet offering you an “Ipad” bundle or a new Samsung flat screen TV if you open a new 2-year CD.

If you click on one of the advertisements, you will immediately be transported back to 1996 which was not only the last time gifts were routinely offered for opening a CD, but also appears to be the year that the website where you have landed was designed.

If you can navigate through the 1996-ness, you find an offer that is real and present and interesting, but not for everyone.  The two-year CD rate is 1.85% - which today is a very competitive 2-year online CD rate.  In some parts of the country, you will find better 2-year CD rates at local banks or local credit unions.   (Giftsforbanking is also offering three and four year rates on this product that are not competitive).

If you open a 2-year CD with over $100,000, you’ll receive a coupon redeemable for any of several products such as a Trek bike, a 55-inch Samsung curved TV, a 12-inch MacBook, a tag Heuer Aquaracer watch, a Baume & Mercier watch, a Canon Eos camera or a DeLonghi expresso machine.  With only a $25,000 deposit, you can get a current third-generation Apple watch.   With a $50,000 deposit, you can get a number of other interesting products or packages, such as a Bose speaker.  Based on our research, it appears that you can get a gift or package of gifts that retails as high as $1,500 with a $100,000 deposit, and for those who are number crunchers, such a gift will gross up a CD return by 75 basis points annually.

GiftsforBanking is owned by Flushing Bank.  The bank was established in 1929 as the Flushing Savings Bank in the Borough of Queens, New York and renamed in 2010. With assets in excess of $6.2 billion, it is now one of New York State’s largest banks.  You can learn more about the bank here. Flushing Bank  owns IGoBanking and Bank Purely and this CD is opened through the IGoBanking website.  They permit more than one CD to be opened under this program which is also quite interesting, but, as with any bank, you should stay within FDIC-insurance limits.

The fine print on the GiftsforBanking website includes the following language:

“There is a substantial penalty for early withdrawals, including the value of the gift chosen. The value of all gifts will be considered as interest on your account for tax purposes in the first year the account is opened. A 1099-INT statement for the value of the gift (including applicable sales tax, shipping and handling costs) will be issued for the year of gift redemption.”     

When we contacted Flushing Bank, we learned that the penalty for early withdrawal is 6 months on the 2-year CD and that those redeeming can expect a 1099-INT for “more than” $575 for a $25,000 deposit, $1100 for a $50,000 deposit and $1700 for a $100,000 deposit.

With the receipt of the 1099-INT, you will be responsible for reporting and paying tax at your ordinary tax rate in the year in which you open the account.  Should you need to terminate the CD early, you’ll also be out the bank’s 6-month early withdrawal penalty as well as the amount reported under the 1099-INT.

This offer therefore only makes sense if you are entirely certain that you will not need or want your principal back before maturity and that the product you are receiving as a gift is one that you would definitely want to purchase anyway.   But, if your goal is simply to be rewarded for your banking activity, we prefer opening a new travel rewards credit card where you can get more value without locking up your capital and receiving a tax liability.