A callable CD allows the bank to redeem the CD at the time of the call option or anytime thereafter. The time period from when the CD is opened to when the call option takes effect is known as the lock period. During the lock period, the bank can’t redeem the CD. Lock periods typically range from three months to two years. A traditional CD does not allow the bank to redeem the CD during the term.
Callable CDs are common for brokered CDs, but they are rare for direct CDs that are sold directly from banks and credit unions. Every now and then I come across an institution offering callable CDs.
Should savers ever consider a callable CD as an alternative to a traditional CD? Many readers have commented over the years that they consider a callable CD to be too favorable for the banks. As one reader commented, it’s a "heads the bank wins; tails I lose" proposition.
The main reason one would choose a callable CD over a traditional CD is for a higher interest rate. The higher the rate premium of the callable CD, the more attractive it becomes.
Another reason to choose a callable CD is the interest rate environment. Callable CDs are most risky when interest rates are falling. In a falling interest rate environment, the CDs will likely be called and the depositor will lose the high rate. However, if rates are flat or are rising, there will be less chance that the CD will be called. If the CD is called in a rising rate environment, the depositor should be able to find another CD with the same or higher rate.
In summary, if interest rates have bottomed, callable CDs can be good deals. Of course, no one knows for sure if interest rates have bottomed.
To be a good deal, a callable CD has to have a higher rate than non-callable CDs. Below are some examples of the rate premiums of callable CDs.
MidFirst Bank which has branches in Oklahoma and Arizona regularly offers competitive callable CDs directly from its branches. Below is a list of its 7-year callable CD rates and its 7-year non-callable CD rate as of 8/19/2013.
- 2.50% APY 7-year Callable CD with a 6-month lock
- 2.40% APY 7-year Callable CD with a 1-year lock
- 2.30% APY 7-year Callable CD with a 2-year lock
- 2.00% APY 7-year CD (not callable)
It’s very common for brokered CDs to be callable. In Fidelity’s brokered CD table, there’s a call-protection column that is used to identify callable CDs. If this column has a “no”, the CD is a callable CD with no call protection. If this column has a “yes”, the CD has call protection and is not callable. To determine the lock period, click on the bank’s name. This takes you to the CD details which includes the call protection field. If there is no call protection, there should be “view schedule” link. Click on this and you can see when the CD can be called.
Below are some examples of new-issue brokered CDs from Fidelity as of 8/19/2013. I’ve included the best rates for callable and non-callable CDs for several terms:
- 3.15% 10-year callable CD (1-year lock) from MB Financial Bank
- 3.05% 10-year non-callable CD from CIT Bank
- 2.55% 7-year callable CD (6-month lock) from Compass Bank
- 2.50% 7-year non-callable CD from GE Capital Bank
As you can see above, the rate premiums for callable brokered CDs are small. However, if you prefer buying a CD directly from a bank, a callable CD can allow you to get a significantly higher rate. At least, that’s the case with MidFirst Bank. The premiums may be smaller at other banks that offer callable CDs.
In today’s interest rate environment, how much of a rate premium would a callable CD need to offer for you to consider it a good deal?