Unlike most of what I post, these CDs aren't noteworthy for the high rates. They're noteworthy because of an option that the bank is offering. Texas Exchange Bank is offering higher rates if customers choose the "No Early Withdrawal" option for its CDs. The bank is advertising this option on its website as of 11/06/2012. This is the first time I have seen a bank or credit union give this option.
Most of the time, banks and credit unions bury the early withdrawal policies in the account disclosures. Most banks and credit unions allow an early withdrawal with a penalty. However, several institutions have language in their disclosures that suggest that an early withdrawal can be disallowed. Ally Bank recently added language to its disclosure giving them this right.
With many banks being sneaky with their CD early withdrawal policies, it is nice to see a bank being upfront with its policy. However, this brings up some important questions. How much is the early withdrawal option worth? For the case of Texas Exchange Bank, choosing the "No Early Withdrawal" option will result in CD rates that are 20 basis points higher. For example, the 5-year CD APY goes up from 1.40% to 1.60%, and the 30-month CD APY goes up from 1.10% to 1.30% (as of 11/06/2012). For this case, I don't think the higher rates are worth it. The "no early withdrawal" option is more appealing for shorter terms since there's less chance we'll see big changes in the rate environment. Another thing to consider is the size of the early withdrawal penalty with the "early withdrawal" option. That isn't clearly disclosed by Texas Exchange Bank. The appeal of an early withdrawal is diminished with larger early withdrawal penalties.
Another interesting question is if you choose the CD with the "early withdrawal" option, does that guarantee you the ability to make an early withdrawal? I can't see how the bank could argue that it has the right to refuse an early withdrawal when you sacrificed yield to maintain the option of an early withdrawal. Unfortunately, the bank could still reduce early closures by having a large early withdrawal penalty. And as we have seen, there's a risk that institutions can increase the early withdrawal penalties on existing CDs.
I have been talking with bankers who are thinking more about their early withdrawal policies. If banks put more thought in their policies, it might mean fewer good deals which give savers the option to get out of a long-term CD with little cost. However, it might also reduce the chance of unpleasant surprises for savers if banks try to weasel out of their misleading CD agreements.
Poll: How Much is an Early Withdrawal Option Worth?
I thought this question would make an interesting poll. How much higher would a CD rate have to be for you to accept a "no early withdrawal" option? As I mentioned above, there are several factors to consider. For simplicity of this poll, assume you are considering a 3-year CD. Also, assume a 6-month early withdrawal penalty if you choose the CD with the "early withdrawal" option. Finally, assume that the CD rate that allows an early withdrawal is very competitive and near the rate leaders. So if you decide on giving up the right for an early withdrawal, you'll get a top rate.