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5-Year CD Rates Fall Below Savings Account Rates at Many Online Banks

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As online banks cut their deposit rates, an interesting phenomenon has occurred. Many online banks now have higher interest rates on their savings accounts than their 5-year CD rates. We typically expect long-term CDs to offer the highest rates since you’re locking in your money for the longest period of time. That’s not the case today as banks transition their deposit rates in this new zero interest rate environment.

Here’s a snapshot of the rates at a few online banks with these inverted rates. APYs are accurate as of 5/18/2020:

    Online Bank

    Vio Bank

    BrioDirect

    American Express NB

    Axos Bank

    Barclays

    PurePoint Financial

    Savings Account APY

    1.50%

    1.40%

    1.30%

    1.30%

    1.30%

    1.25%

    5-Year CD APY

    0.60%

    1.00%

    1.10%

    0.40%

    1.20%

    0.75%

For Treasurys, it’s called an inverted yield curve when short-dated Treasury yields are higher than long-dated yields. Parts of the Treasury yield curve were inverted many times last year. Recessions often follow inverted yield curves. The lower yields on the long-dated Treasuries often signal market concern for the economic outlook.

When banks set their long-term CD rates lower than their savings account rates, it’s a sign that banks are anticipating lower rates in the future. It’s also a sign that banks will probably be cutting their savings account rates. Since it’s easy for savings account customers to move money from online savings accounts, competition and the need for deposits may deter online banks from quickly cutting their savings account rates. So this inverted yield condition will likely end as online banks slowly lower their savings account rates.

You expect to be rewarded with higher interest rates in CDs than in savings accounts, and you expect to be rewarded more on longer-term CDs. That higher interest rate offsets having to lose access to your money for a longer period of time. Until the CD reaches maturity, you can only access the principal of the CD with an early withdrawal penalty (for most cases). You can withdraw money from savings accounts without any significant restrictions.

For depositors, CDs have one big advantage over savings accounts. That advantage is a rate lock. When rates are falling, the guaranteed interest rate for a period of time can be an advantage. The opposite is true for banks, which may consider the rate lock detrimental. If the bank’s old CDs have interest rates much higher than the current rates, it’s costly for the banks.

When does a 5-year CD rate become too low?

This is a difficult question for a CD investor, especially one who uses CD ladders.

Consider how low online savings account rates may fall

One important factor to consider is what the bottom may be for the online savings accounts. During the last zero rate period from 2008 to 2015, you could still get online savings accounts with rates near 1.00%. For example, Ally Bank’s savings account bottomed out at 0.84%, Discover Bank bottomed out at 0.80%, and American Express bottomed out at 0.75%.

If we assume this new zero rate period won’t be worse than the last, 5-year CDs with rates near or below 1.00% don’t make sense. However, in the last 20 years, every recession seems to be followed by ever lower deposit rates. So it is possible we may see lower bottoms on online savings accounts. If we have to live with 0.25% rates on online savings accounts for several years in the future, locking into a 1% rate for five years may not be as crazy as it sounds.

Consider CD early withdrawal penalties

Another factor to consider is the CD early withdrawal penalty (EWP). A low-rate on a long-term can be more acceptable when the EWP is smaller. Even if the CD rate is lower than the current savings account rate, you may end up earning more interest in the CD after a few years even if you close the CD early. That becomes more likely if the EWP isn’t too big.

As an example, let’s say you open a Barclays 5-year CD today which has a 1.20% APY and an EWP of 180 days of interest. If you close that CD in three years, the effective annual yield for those three years after you factor in the penalty will be about 1.00%. If the highest savings account rate by next year is only 0.75%, the Barclays 5-year CD would have actually been the better deal.

On the other hand, it’s difficult to see how the 5-year CD at American Express National Bank would be a better deal than keeping your money in online savings accounts. If you open a American Express 5-year CD today which has a 1.10% APY and a large EWP of 540 days of interest, any early closure will be costly. For example, if you close the CD after three years, the effective annual yield for those three years after you factor in the penalty will be about 0.56%. I consider it unlikely that online savings account rates will fall enough for this 5-year CD to be the better deal.

To review the effective yields of these two CDs closed early, please check out our CD Early Withdrawal Penalty Calculator. Also, when factoring in CD early withdrawals, be aware there is some small risk that a bank or credit union may increase EWPs on existing CDs. There have been cases when credit unions have increased EWPs on existing CDs. Also, there’s a small risk that a bank or credit union may disallow an early withdrawal request. In that case, you would be completely locked out of accessing any principal of your CD until maturity. The odds are higher at banks and credit unions that have disclosures that give them the right to make such changes. I reviewed these types of CD disclosures a few years ago.

Don't settle for these low 5-year CD rates

Fortunately, we don’t have to settle for 5-year CDs listed above. There are still online banks that are offering much higher rates, and there are several credit unions that are offering even higher rates. However, the top CD rates continue to fall, and it’s now difficult to find 5-year CD rates above 2%.

Is a 2% 5-year CD too low for you? What’s the lowest 5-year CD rate you’re willing to accept?

Related Pages: savings accounts, 5-year CD rates, nationwide deals, Internet banks, banking tools and data
Comments
buckeye61
  |     |   Comment #1
pretty dismal outlook for CD rates. I don't expect to renew any CD's in the next 12 to 18 months, but one thing we learned in the last zero bound years(2008-2015) is that financial institutions will periodically offer special CD deals to add to their funding levels, but when they do you have to act quickly.
gregk
  |     |   Comment #4
Those "special CD deals" may be 5 years at 2% rather than the 3% we looked for during the previous crisis, however.

I wouldn't accept that now, but beaten down over the next year or two into the reality of such a new scale, might likely surrender.
#2 - This comment has been removed for violating our comment policy.
deplorable 1
  |     |   Comment #3
It looks like we are going to get a over reaction with ultra low deposit rates before anything gets better. The same thing just happened with the stock market recently. Once all the interest rates hit rock bottom we will probably see a couple of FI's offering better rates again. The only new CD's I'm buying are 3-6 month with a 2% credit card on a monthly basis where the low interest rate is basically irrelevant. Looks like I will be having to max out all my add-on CD's in the near future with no other good options available.
gregk
  |     |   Comment #6
What add-on CD's with "room to run" do you currently hold?
deplorable 1
  |     |   Comment #9
3 MACU add-ons 2 3.51% and 1 3.75% youth. 2 GTE 3.04% unlimited add-ons. I haven't bothered maxing them out yet since I have a bunch of CD's coming back this year and then I will fill them up. I have $100,000 rolling in short term CD's for the cc rewards as well. Everything else is in monthly and quarterly paying high yield dividend stocks aside from liquid cash in GM right notes and Ally demand notes earmarked for bills or paying off 0% no fee balance transfers.
CDmanFL
  |     |   Comment #12
Brother Deplorable,
What dividend stocks do you own? I always value your opinion. I own AT&T and would like to purchase some additional ones and I know that if you have it, you did your homework. Thanks.
deplorable 1
  |     |   Comment #18
No ATT but I do own CTL. My largest holding is PBA have owned it since it was PVX and just bough more at the recent lows. Anything under $20 is a good deal. Some REIT's JRI, ARR, REML. A couple from Blackrock BHK, HYT a few utilities like CNP. T looks like a decent price right now looks like you could have bought it for $26 recently.
deplorable 1
  |     |   Comment #40
The problem with investing in dividend paying stocks at the moment is that many sites use the trailing 12 months to calculate the dividend yield. Many stocks/funds have cut their dividends making the yields look artificially high. Make sure you know what the current payout is before jumping in.
GreenDream
  |     |   Comment #51
Indeed. and check to see if the stock you are interested in has announced plans to cut or suspend their dividend. That high yield based on past dividends does no good when the company has decided to suspend dividends entirely.
GreenDream
  |     |   Comment #52
Further to that, when looking at dividends, I do my own calculations (or rather I have my spreadsheet do the calculations for me, I just plug in the requisite numbers) on the socks I'm interested in based on both the trailing 12 and the most recent available dividend number and then take the lower value for my assumption for the dividend yield (as sometimes the most recent dividend can be higher than normal for various reasons)
anonymous
  |     |   Comment #39
What 3 month CD's?
ichaelm
  |     |   Comment #5
Advancial FCU is the exception to this: its 5 year CD APY is 2.16%; its top Money Market/Savings APY is only 1.01%. MM requires a $100k minumum, CD only requires $50k.
Sam Donald
  |     |   Comment #7
There are 11,000 banks and credit unions in the great United States of America..

This article lists 6. They are the exception, obviously.
GreenDream
  |     |   Comment #22
Yeah, so what's your point?

Also, while there are 11,000 banks and credit unions, this article specifically isn't about all of them, it's about the subset known as "online banks" (it says so right in the headline: "...at many online banks"). And the six listed are only a sample to illustrate the point being discussed (that there is an inversion showing up in the rates at many, not a all, online banks), not meant to be representative of all 11,000 banks and credit unions.
#23 - This comment has been removed for violating our comment policy.
GreenDream
  |     |   Comment #25
Sam (or whatever name you'll post under next) you need to follow the conversation. This article is specifically about online banks (and not even all of the, just many of them). not all 11,000 banks and credit unions. Pointing to all 11,000 banks and credit unions is a non-sequitur to the conversation. And again, the 6 listed are not the be all end all, just an illustrative sample. Whether they are the exception among the population being discussed (online banks) or not has not been established, certainly not by pointing to a population that is not under discussion (all 11,000 banks and credit unions in the US).
#26 - This comment has been removed for violating our comment policy.
#30 - This comment has been removed for violating our comment policy.
#31 - This comment has been removed for violating our comment policy.
Sam Donald
  |     |   Comment #8
I don't understand the negative outlook on rates. I have 50% in 7 year CDs and am planning to terminate them early in the next few months. I was prepared for a normal recession, but this has already proven itself to be a quick brief correction, with inflation or even hyperinflation next year. Trillions in new dollars and supply shortages. Expect 7%, not 2%.
deplorable 1
  |     |   Comment #10
Why terminate 7 year CD's in this environment and pay a penalty? Where are you going to put the cash?
Duck
  |     |   Comment #46
My guess under the mattress
#13 - This comment has been removed for violating our comment policy.
GreenDream
  |     |   Comment #24
Given the current low rates (which will likely continue for at least the next few months, even if your belief in coming hyperinflation was to be fully realized) why would you early terminate CDs (taking the hit of early withdraw fees) that were bought when rates were higher and thus are giving you better rates that anything you cold possibly replace them with at the time you are planning to terminate them? When the "expected" rates jump up to 7% "next year", then it would be logical to consider early termination of a lower rate CD for buying up a much higher rate one. But early terminating a higher rate CD when the replacement options are much lower? Unless you locked in an extremely bad deal (IE for whatever reason you bought an extremely low rate CD when, with just a quick glance at the CD lists here at DA, you could have easily found better rates, even at today's low rates) that makes no logical sense.
losingtrader
  |     |   Comment #11
Given the fed support for investment grade bonds, I think that's where I'm going with CD's that are maturing
#20 - This comment has been removed for violating our comment policy.
DA123
  |     |   Comment #14
Stock market up almost 1000 points. Interest rates near zero with negative rates discussions ongoing. Sounds like a plutocratic plot to me...
Predatory Depositor
  |     |   Comment #15
I don't try to predict which way markets are going to go, whether it's the stock market or the market for bank deposits. I don't think there's any "safe" way to come out ahead right now. In a crisis situation like this, the game is about preservation not profit. With the massive government spending in progress, I don't think there's any rate you can get at any bank that's going to keep you ahead of inflation over the next year or two at least. If you put your money in a bank, I think you're agreeing to take a loss to inflation to avoid an even bigger loss with something riskier. That's a rational choice in this environment. It's a matter of relative risk and relative loss.

It's all about preservation now.

With a quarter of the workforce out of work, looming bankruptcies of tens of thousands of small businesses and numerous large ones too, and banks depending on loans to individuals and businesses for 75 to 80% of their revenue, we may be seeing the calm before the storm in financial institution failures. You would be wise to button up your accounts. Low rates I not good for banks. They are all hurting right now.

Even in a best-case scenario, bank failure could be a nightmare. Imagine getting a check in this 1% environment from the FDIC or NCUA in the amount of your life savings, from that 3+% 7 year CD you had at the financial institution that went under with a note from the insurer saying don't worry, you're insured and we have your back. You can count on us!
#16 - This comment has been removed for violating our comment policy.
Predatory Depositor
  |     |   Comment #17
"What’s the lowest 5-year CD rate you’re willing to accept?"

In a plain CD? Probably around 6-7% because of the possibility of rampant inflation during that period. In general I don't like CDs longer than 3 years so part of the premium would be to compensate for that. Obviously that's a fantasy in this market so it saves me the trouble of having to look at those options.

I still have over 4 years left on a 3% unlimited addon as long as they don't renege on the deal... which they very well may at some point soon. I am saving that as "insurance" for some massive CDs I have maturing next year and the year or two after. But you can't count on anything in this environment. It's the wild west for bank depositors right now.

I am currently in the CD game with a pretty substantial amount of cash from recently maturing CDs, both IRA and non-IRA. The non-IRA is easy. It went into a liquid account at 2.30% guaranteed until mid November. I'll probably keep it there until the bitter end and then take the hit on whatever I can get. In the meantime I'll keep my eyes open for deals, but it's going to be hard to give up that rate for a lower rate just to lock it in.

The IRA money is a whole different animal. The problem now has been processing time. Rates fell so fast I was unable to get the FIs to move the money fast enough to take advantage of the few remaining deals. So I changed my strategy focusing on stronger FIs with less than top rates for short term CDs. I'm keeping the terms to a year thinking that it can't get much worse by then. I'd rather take a few beeps less than get a check in the mail from the insurers, so I stuck with the stronger FIs.

But it ain't over yet. I've been able to lock in rates (I think!) on the majority of the funds at the higher end of the current market rates. But I'm still trying to get these transactions done... currently have 5 different FIs involved. This is not fun.
RegularJoe
  |     |   Comment #27
5 years is a long time when locking up money in my experience. When doing research, it is easy to see the years as just numbers and lose sight. But I did so lock a CD in 2012 - 2017. I think I locked in one at an online bank rate of 2.32%. I was pretty happy however I would never go below that for another 5 year imho. Current deposit rates could be zero (if not negative) and I would still not lock it up for 5 years at anything less than around 2-2.3% in the least. Life is so unpredictable as it is.
Ratesaver
  |     |   Comment #28
Cd rates are very low and everyone has a different game plan as age has something to do with your planning. An older person may go long because he or she just don't want to get involved with moving money so often however their is a common sense view also... Take the 5yr. cd at maybe 2.32 may be a bottom for me... Average out with your maybe 3.50 cds if you were lucky enough to get in the past yr and you are in pretty good shape... So 2.30 is my bottom for a 5yr. cd
milty
  |     |   Comment #29
"What’s the lowest 5-year CD rate you’re willing to accept?" During the Great Recession, I was easily getting 2.17% APY from a local CU (maybe could have done better if knew about DA) for a 5yr CD. My plan for 2020 is to use my Add-On CD, if still available. Next year, however, will be a problem, with a couple CDs maturing, if rates don't start recovering.
Kaight
  |     |   Comment #32
milty solid plan provided, as you state, your add-on CD remains available. Suggest you come up, right now, with a game plan should that add-on privilege be withdrawn. Take into account they must offer you thirty days' notice. Realize those are thirty calendar days, not thirty business days; weekend days count, holidays count even though the bank or CU is closed. Think in advance about your options should this worst case ensue. For example, during that thirty days you could pay the penalty, close your existing CD, and more the remaining funds into your add-on. Regardless what you decide, give thought, be prepared, have a plan should worst case materialize.
milty
  |     |   Comment #33
Kaight, thanks for the suggestion. This CD has a 18m EWP, pretty steep. Sad, as i look at this FI (CD-Bank), it's 5y is at 0.5% APY. These indeed be inverted times for us savers. However, considering Powell's recent 60m interview, made me wonder just how vested he be in the market. A seekingAlpha article from 2017 reveals that ole Jerome be indeed pretty invested, 10x as much as Yellen. Too bad some die-hard DA savers couldn't get on the board . . . .
#34 - This comment has been removed for violating our comment policy.
Choice
  |     |   Comment #35
Sam, where are you?   Fake News...I don’t want to have a position on the Board...I may have to find someone who could clean house at the fed! And I wasn’t posting “years ago”. 
#36 - This comment has been removed for violating our comment policy.
deplorable 1
  |     |   Comment #41
During the last recession I settled for 2.5% on a 5 year CD. It was the highest 5 year CD available at the time. When rates started rising I thought I had made a bad move but interest rates in liquid savings only went up to about 2.5% and only for a short time at that. So as long as you are able to match or beat the best yields in liquid accounts during the 5 year term I think you come out ahead. I use that as a rough guide.
blazer9
  |     |   Comment #37
Mountain America C U. Add-ons Hope They Survive.

Nature of Dividends.The Credit Union pays dividends from current income and available earnings, after required transfers to reserves at the end of the dividend period, thus dividends are not guaranteed. The Dividend Rate and Annual Percentage Yield set forth in the Schedule are prospective rates and yields the Credit Union anticipates paying for the applicable dividend period
Kaight
  |     |   Comment #47
Weiss Research at present gives MACU an A- rating. That's not bad at all. I think you have a shot, unless the pandemic hits 'em especially hard.
Choice
  |     |   Comment #48
Q. How can a rating be relevant with the recent dynamics?
GreenDream
  |     |   Comment #53
Ratings are only a point of data to consider and make for a convenient starting place (they are not meant to be the be all and end all). If their rating was low before "the recent dynamics" that's a warning sign that they could be in for rough times as they didn't start out in a good place. if the rating is good prior to"the recent dynamic" that's a sign that they at least entered the current situation in decent shape and thus have a better shot at surviving it than their lower rated brethren. You should, of course, always look at other factors besides ratings.
Science and Facts not Lies
  |     |   Comment #38
Though I know no one here would be foolish enough to open a CD at Bank of America, I couldn't help but sadly laugh when I saw the rate their offering for a 10 YEAR CD:
120month CD at Bank of America, paying.... wait for it.... 0.15%.
I wonder if there's even one person in the US somewhere who opened one of these up...
ichaelm
  |     |   Comment #42
Science and Facts, I'm giving you thumbs up on your comment for making me laugh!!
Choice
  |     |   Comment #43
Be careful! Too big to fail! Return of principal is more important (to that audience) than return on principal. Further, BoaA will, if needed, call in a perfectly performing loan (here is the rub...with fed support!)...most FIs can’t (b/c of loan mix) or wouldn’t and thus going belly up is the higher rate FIs “only” option in tough times! The latter costs the regulators real $
DCGuy
  |     |   Comment #44
I moved some IRA money into a Bank of America 3 year CD at 2.4% right at the end of 2018. Rates were rising at the time and I was not sure if it was a good move to lock in at the time. Their current rate for a 3 year CD is now 0.2%.
Predatory Depositor
  |     |   Comment #49
I'd wager quite a few since BoA ranks #1 in deposits.

The fact that the banks with the highest level of deposits pay the lousiest rates, really challenges efficient market theories.
GreenDream
  |     |   Comment #50
The curveball in the "efficient market theories" for banks is brick and mortar (b&m) vs online. BoA is a b&m bank (one of, if not the, largest).That fact is a very large percentage (I'd dare say the vast majority) of people with bank accounts, have them at their local b&m banks at whatever rates those banks happen to be offering. And those people, particularly the older ones who've had their accounts at those banks for decades (millennials are 2 to 3 times more likely to switch banks than older adults, according to one survey), don't bother shopping around for better rates - either though ignorance that rates are better elsewhere or through laziness/inertia (since their current bank is conveniently located, they can't be bothered looking beyond it).
deplorable 1
  |     |   Comment #54
BoA has the worst interest rates and fees I would never do a CD with them. Still I do use them for my free checking account though basically because they bought out my old bank. Up until recently they also had the best and longest 0% no fee balance transfers for the past 3 years(18 mo. no bt fee) and a fairly decent cash rewards credit card with a 10% bonus if you have a checking account with them. So that's 3.3% for online shopping and 2.2% for warehouse clubs/grocery stores 24/7.
calwatch
  |     |   Comment #55
BoA had almost competitive rates about six to nine months ago, so did Chase and Wells Fargo. It was unusual to see 1.5% or 2% rates from them, although most were for short (7-20 month) terms.
Polaris
  |     |   Comment #45
I'm going to be retiring soon, and was hoping to retire with decent interest from my money market accounts. Now it looks like we'll eventually have negative interest rates. This will force many people who are conservative with their money to look at the stock market. That could be a risky mistake.
Choice
  |     |   Comment #57
Keep working if you were planning on a certain rate
mffarrell
  |     |   Comment #56
I am thankful for locking-in 2,3,4, and 5 year CDs at GE financial. I moved a significant chunk of change into my accounts.

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