One year ago I described the good deal at iGObanking.com which was offering top rates on its 7-year and 10-year CDs. Not only were the rates competitive, but the long-term CDs had a mild early withdrawal penalty (EWP) of only 6 months of interest. That allowed these CDs to be good deals even if you had intended for the CDs to be closed early. It looks like the bank realized the deal was too good, and it has increased the EWP for the long-term CDs to be much worse. It's important to note that this change will only affect new accounts and renewals. Hat tip to the DA member who mentioned this change in the forum thread and posted the email that was sent by iGObanking.com to its customers. Below is that copy:
Dear Valued CD Customer:
Effective July 10, 2012, our iGObanking.com® CD early withdrawal penalties and renewal rates for new accounts and renewals changed as follows:
Early withdrawal penalties (a penalty may be imposed for withdrawals before maturity)
• If your account has an original maturity greater than five years: The fee we may impose will equal the loss of either all interest earned on the amount withdrawn or half the interest amount that would have been earned on the amount withdrawn during the entire term of the certificate, whichever is greater. Penalty may reduce principle.
Automatically renewable time account
Each renewal term will be the same as the original term, beginning on the maturity date. The interest rate will be the prevailing renewal rate on the maturity date which has the same term and minimum balance (if any) as the original time deposit.
You will have seven calendar days after maturity to withdraw the funds without a penalty.
These changes will be applicable to your account at time of renewal.
You can review the latest iGObanking.com disclosure which includes this new EWP in this terms and conditions page.
This change doesn't mean much now since iGObanking.com's 7-year and 10-year CD rates are so low (currently only 0.50%). However, iGObanking.com has a history of making large rate changes so these could become more competitive in the future. Last week I reviewed some of the new competitive CD rates from iGObanking.com.
If iGObanking.com does raise its 7-year or 10-year CD rate to be competitive, this new EWP will make the CDs a much harder sell. An early closure means the customer will lose at least half of the total interest that would have been earned on the amount withdrawn. So for a 10-year CD, that's 5 years of interest which is 10x larger than the previous EWP of 6 months of interest. The EWP can actually be even larger. It could be equal to all interest earned on the amount withdrawn if that's larger than half of the interest. For a 10-year CD, the customer will lose all interest earned if the CD is closed early between 5 and 10 years.
I don't like seeing such a harsh EWP, but I'm glad iGObanking.com stated that this new EWP will only affect new accounts and renewals. That's how EWP changes should take effect. It should not affect existing CDs like what happened at two credit unions.
This is a useful reminder that you have to be careful when your CDs mature. If the CD rate is still competitive, you may be tempted to let the CDs renew without reviewing the latest disclosure. This shows why it's a good idea to review the latest disclosure. New and larger early withdrawal penalties have been common in the last couple of years. Last year PenFed raised its 5-year EWP from 6 months to 12 months of interest. Bank of America also increased its EWP. Unlike PenFed, Bank of America's EWP becomes very harsh for low rates. Both PenFed and Bank of America did not apply the new EWPs retroactively on CDs. The changes only applied to new CDs or renewals.