Promptly lock in elevated fixed interest rates now.
With decreasing interest rates, invested individuals initially notice the impact on their savings accounts. For those aiming for decent returns over a medium to long-term span, fixed-term deposits could be a wise choice. The details on what to look out for are shared by Max Herbst from FMH financial consulting.
Following the persistent inflation in the eurozone, the European Central Bank (ECB) has been regularly revising interest rates since mid-2022. With these actions showing their effect and inflation gradually stabilizing, the ECB is once again under the spotlight.
Analysts predict the ECB to make succeeding interest rate modifications downwards this week. Additional drops are highly probable in the fall.
The positive development for the dwindling German economy is welcoming. However, savers might watch these developments with apprehension. After the earlier interest rate reductions in June and July of this year, it was evident that banks with superior savings interest rates promptly passed on lower interest rates to their clientele. From the banks' perspective, this is reasonable: They receive less interest on the customer funds kept at the ECB, but wish to maintain profits, and thus reduce the interest they pay to their customers accordingly.
Therefore, it is reasonable to anticipate further sizable decreases in savings interest rates in the imminent weeks. Certain banks have already instituted rate reductions around three weeks back in anticipation of the ECB's move: This was particularly evident in reduced interest rate guarantees.
While it is possible that some institutions will still provide savings interest rates of 3.75 percent or more for now, it can be assumed that new customers will need to settle for 3.50 percent and continuously accept lower rates with each ECB key interest rate cut.
Savers who value stability and returns should think about locking their savings for a certain period in a fixed-term deposit account. The advantage is that the rate agreed at the outset holds for the duration of the term, such as one, two, three, or even five years. The disadvantage is that the customer cannot access their money during this period. To still ensure a certain degree of accessibility and liquidity, it is therefore advisable to disperse the desired investment amount across several accounts with varying terms.
Fixed-term deposits: Which terms are ideal?
Before deciding on the appropriate term, it's essential to consider the following factors first:
- How long can or wish I to be without my money?
- How crucial is the highest feasible return?
- And which bank in which country do I trust sufficiently to keep my money with for five years or more?
The answers to these questions interact in the following manner.
For example, let's imagine a woman in her mid-50s wanting to securely invest money for her retirement. In such a scenario, a five to ten-year investment term would be worth considering. Nevertheless, even those who commit for this length, aiming for the highest possible deposit guarantee, will only receive three to 3.15 percent from the superior providers.
Higher returns are available in other EU countries. However, even as a dedicated European, one should contemplate whether one is prepared to transfer one's savings to Italy or Estonia for a decade and trust the deposit guarantee in these countries.
The most attractive deals in the current situation are likely to be the fixed deposits of European banks with maturities up to three years. Depending on one's security needs, one can find banks providing extended German (and consequently unrestricted) deposit insurance and those that provide only the legally required minimum, replacing up to 100,000 euros in the event of a bank failure. Depending on one's security needs, annual interest rates between around 3.5 and 3 percent can be achieved.
Additionally, there is a unique form of deposit insurance: Those who use the fixed deposit comparison of FMH will find the provider "Freedom24" at the top with a maturity of twelve months. It offers exceptional interest rates but limits the statutory deposit insurance to a maximum of 90 percent of the investment and also caps the amount at 20,000 euros. Those who are after top interest rates can make impressive gains here, but should be aware of the risk.
On the other hand, those who desire excellent interest rates and extended German deposit insurance for one year should consider the offers of Grenke Bank (3.35 percent). It has recently entered the fixed deposit market and aims to compete at the top.
In general: Those who wish for high interest rates should act swiftly, as fixed deposit conditions are constantly deteriorating - and every interest rate cut makes it go further down.****
The average of the Top-53-banks is currently only 2.68 percent for one year. Offers of more than 3.25 percent are already worth considering, before they are no longer available.
Max Herbst is the owner of the FMH-Finanzberatung, which has been providing independent interest information since 1986.
After the ECB's reported interest rate modifications this week and potential further decreases in the fall, savers may see further reductions in their savings interest rates. To secure a stable return and avoid these decreases, consider locking your savings in a fixed-term deposit account, where the agreed rate holds for the term's duration, such as one to five years.
