While borrowers are struggling with the ever-increasing interest rates, savers are loving the high interest rates currently on offer.

Savers are getting better returns on their bank deposits, and for those people who are prepared to lock their money away in a fixed deposit, there are excellent rates to be had.

A fixed deposit account is where you agree to leave your money invested for a specific period of time. You can often elect to have the interest paid out monthly, but the returns are higher if you leave the interest to be re-invested.

For investors who are prepared to leave their money invested for five years, the interest earned can be over 12% if left to compound.

For example, African Bank and FNB are offering the best five-year interest rates at nominal interest rates of 9.94% and 9.85% respectively. If the interest is re-invested, the effective rate on maturity would be 12.8% and 12.66% respectively.

High interest rates for a 12-month fixed deposit

If you want to invest your money for only one year, TymeBank is offering the best interest rate at 10.44% nominal and 11% on maturity. TymeBank does not offer fixed deposit rates for longer than one year.

What is interesting to note is that several banks are offering a better nominal interest rate for a 12-month fixed deposit than for 24 months.

Normally the longer the period, the higher the rate the bank is prepared to pay you to keep your money invested. Yet, for example, Nedbank is paying a nominal interest rate of 9.3% over 12 months but only 8.85% over 24 months.

This could indicate that interest rate cuts are priced into the future interest rates. According to Capitec, “the market is currently pricing in this way which could potentially point out to a cut; however, the market will also respond to how the environment and rate cycle changes.”

FNB has chosen to still pay a better rate for 24 months. “Future interest rates may come down and so it’s possible for a 24-month rate to be lower compared to the 12-month rate, although it is not always a certainty. Our approach is to also consider that a 24-month rate requires a customer to lock away funds for longer than 12 months, which means more to a customer, and we value the commitment as such. We factor this into our consideration when determining our fixed deposit pricing,” says Himal Parbhoo, CEO of FNB Cash Investments.

How to get a better rate

Banks will often increase the interest paid for certain customer segments or for certain banking behaviour.

• Leaving your money invested for longer usually provides a higher rate of return.
• Banks like Nedbank who are driving the adoption of digital banking will offer a higher interest rate if you open the account with your banking app.
• Most banks offer customers over the age of 55 a better interest rate. This can be as much as 50 basis points more than the normal fixed deposit rate.

Understand nominal, effective and maturity interest rates

When it comes to advertising interest rates, the interest rates the banks use can cause confusion about what the actual interest rate is, which makes it difficult to compare rates.

The nominal interest rate is the actual interest rate the bank pays each month. This is the best rate to use when making comparisons. The nominal interest rate is used to calculate the daily interest earned on your account balance, which accumulates until it is capitalised on an agreed date every month. The interest is then either reinvested or transferred to your savings account.

The annual effective rate is the interest rate compounded monthly over 12 months if you did not draw the interest out of the account each month.

Interest on maturity is the interest rate compounded monthly over the entire period of your investment. The longer the investment is held, the greater the compounding effect and therefore the higher the interest on maturity.

For example, Nedbank pays a nominal interest rate of 9.75% on a 60-month fixed deposit. If you left the interest to be reinvested, you would have a compounding effect which results in an effective interest rate at maturity of 12.5% per annum. It is the same 9.75% interest paid, but left to compound.

This is why advertised rates can be confusing. If Nedbank used the maturity rate of 12.5% in its advertising, it may look better than the nominal interest rate of 9.94% paid by African Bank, for example, but actually African Bank’s interest rate is higher. Always make sure you compare the same type of interest rate.

This article first appeared in City Press.