Bank Offers Higher Rates For "No Early Withdrawal" CDs - Worthwhile Benefit?


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.

Anonymous   |     |   Comment #1
The no early withdrawal is a trap, don't fall for it. The bank can change it at a whim if they get into truble or FDIC order them to comply with some regulation(s).
Sam (anonymous)   |     |   Comment #2
Sounds like banks are starting to put steps in place to protect themselves against inflation.  This is the first indication of interest rates possibly starting to rise in the near future.  Of course, the election has a lot to do with it as well.
Anonymous   |     |   Comment #3
If the banks were to offer better rates on "No Early Withdrawal" CDs, it is not a trap as long as it is clearly stated up-front.  No trap, just take personal responsibility to know what you are agreeing to.
Anonymous   |     |   Comment #4
People have to know what they are getting into.  I'm tired of people complaining about mortgages they knew they could not afford.  Read before you sign.  DOn't sign if you don't want to raed.  I would do a CD like this for the xtra interest.
Anonymous   |     |   Comment #5
I wouldn't do a CD like this for extra interest because no one knows what emergencies lie in our futures.  I never expected to be in the predicament I am in today and I have to have the peace of mine of knowing my money is available to me even if I have to pay an EWP to get it.  For this reason, I try to make sure I only deal with banks I truly feel will abide by what they have in the CD and not use any "If's" against me if I need my funds.   
Anonymous   |     |   Comment #6
Some agreements may contain they can change terms  notice.  This can include  early withdrawls.  It depeneds what legalize they use.   The gov't owns a big piece of Ally.   They would support Ally if rates went up to prevent a run on the bank by people closing their CD's early.  The deck is always stacked in the gov't favor.
Anonymous   |     |   Comment #7
For some reason no one ever mentions this..............but in a truly desperate situation where you need to get at your CD money & they don't let you, you can always get a "secured" loan using your CD as collateral. Obviously it's not an ideal scenario, but in a real emergency one does have this option.  My understanding is that the interest rates for such a loan are quite low & you can get up to 90% of the CD value on the loan. I mention this only because it always seems that the default attitude around here is one of utter powerlessness & a certain resignation that the world is against you & nothing can be done. 

The truth is that there is always something that can be done, there are always options.
Anonymous   |     |   Comment #8
To Anonymous - #3,

You are very naive my friend, the banks can change the disclosure at any time for any reason.
What good is no early penalty if they will not allow early withdrawals on the first place.
You still need to get approval if you like to withdraw early anyway. If they say no, you have been taken to the cleaners.

#1 got it right.
Anonymous   |     |   Comment #9
#8  If they say no, you haven't been taken to the cleaners.  You can just go to one of your other banks and use another CD to withdraw early.  The bank who refuses will lose out because I sure wouldn't put any more CDs with them and also warn others about a refusal. 
Anonymous   |     |   Comment #10
#8, apparently you are confused.

First.  I am not your friend, or foe for that matter. 

Second.  you don't appear to comprehend the terms of what "No Early Withdrawal" CDs are. 

Third.  I am certainly not naive when it comes to CDs.  I have stashing cash in CDs in banks across the country for years without a single problem opening or redeeming them. 
Anonymous   |     |   Comment #11
To #10,  Would you please elabirate on these terms from the bank's web site:

  • "No Early Withdrawal" CDs are not redeemable prior to maturity.
  • Minimum balance of $10,000 required for displayed rates
  • APY (Annual Percentage Yields) are accurate as of the date indicated on this sheet and are subject to change without notice
  • Fees could reduce earnings on the account
  • Please consult your personal representative for legal and/or tax advice
  • Other limitations may apply
  • ""
Harry (anonymous)   |     |   Comment #12
I think extra 0.2% is plenty for this option. Using the PenFed 3-year CD at 1.6% as an example, if they offer a no-early-withdrawal 3-year CD at 1.8%, I would go for it. If you redeem at the end of 12 months, a 2-year CD must offer 2.3% at that time to beat sticking to the original term. If you redeem at the end of 24 months, a 1-year CD must offer 3.0% to beat finishing off the 3-year term.

People tend to way overvalue these options. As a general rule, it's more profitable to sell options, not buy options.