Are You Aware That Some Banks Pay Bonuses For Early Withdrawal?

NeilStanley | Feb 6, 2025 | 62 posts since 2013

Check out CDtwo in this link Certificates of Deposit (CDs) | TS Bank

and run the early withdrawal calculator at https://www.core-cd.com/Pages/CDtwoRedemptionPublic.aspx?userid=TSBank using the current information on your term deposit accounts at other financial institutions.

Compare the early withdrawal at your financial institution with what you would get with this updated approach and see where you would be better off.

Does your financial institution do this?

What do you think about bonuses for early withdrawal?

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Answers

CDMD | Feb 6, 2025 | 141 posts since 2022

So it’s interesting but not nearly as advantageous as one might think. I read their website. It appears The bonus Only kicks in when rates go down. Of course they would pay you to break your higher paying CDs when rates go down. Because they want you to redeposit at the lower rate or just have you go away. It’s cheaper to give you a nudge to get out than continue paying you the high rate till maturity. They don’t say how much the bonus is. Bet it’s a sliding scale and a fraction of what it would take to make you whole at the lower rate. Why else would they do it? Only value is if by chance you have a real need for the money for an emergency or an alternative investment not interest rate sensitive.
Just my thoughts.

NeilStanley | Feb 6, 2025 | 62 posts since 2013

Thanks for your feedback. You state "Of course they would pay you to break your higher paying CDs when rates go down". Are you suggesting that this is common practice and that your current financial institutions do this? You obviously see the logic of this and correctly assess that it is in the financial institutions' best interest to do this. We agree with you about how logical this is. So, where are the banks that are applying this logic to their term deposits?

CDMD | Feb 6, 2025 | 141 posts since 2022

No I’ve not seen it before. Only analogy I can make is except in callable CDs but the logic is the same. Why would they call the cd. Well because it’s advantageous to them to call it. Bonus is like the same thing. It’s advantageous to them and they want to motivate you to do break the cd so without making it a callable cd. But they are not so motivated to have everyone called at the same time since it’s a funding liquidity issue for them. Most banks hedge their liability book. It cost them money to hedge. This is a way to more cheaply hedge the liability book. Not to be pedantic but a hedge is a financial instrument they buy like insurance to offset the extra cost of those long term higher cost cd vs the cost of dropping interest rates on currency lower cd costs.

NeilStanley | Feb 6, 2025 | 62 posts since 2013

To address your question about the size of the bonuses or fees for early withdrawal use the link https://www.core-cd.com/Pages/CDtwoRedemptionPublic.aspx?userid=TSBank It lets you run numbers to see what the bonus or fee would be. Give it a try and let us know what you think. Thanks!!!

CDMD | Feb 6, 2025 | 141 posts since 2022

Sorry not to disappoint but can’t go through their math to evaluate. I simply believe it’s a pittance of what it would cost them for you to stay and a fraction of the hedge cost they would have to pay Simply said. It’s good for them not good for you by a wide margin

NeilStanley | Feb 6, 2025 | 62 posts since 2013

Here is one example from the calculator as of today. Every day it can change.
Redemption Date: 2/6/2025
Maturity Date: 8/15/2026
Term to Maturity in Months: 18
Current Principal Balance: 100,000
Current Interest Balance: 100
CD APY: 5.15
Estimated Value at Maturity: $108,042.87
Replacement APY for remaining term: 4.49
Current Principal and Interest: $100,100.00
Current Account Redemption Value: $101,062.97
Instant Access Adjustment: $962.97 Bonus

What would you think about $962.97 bonus instead of the standard early withdrawal that other banks charge?

CDMD | Feb 6, 2025 | 141 posts since 2022

Sorry but that’s apples and oranges. To me it’s not a question about a penalty vs a bonus. Certainly if you wanted the money for the hypothetical emergency then the bonus is clearly better. But I’m thinking this way. Not planning for the emergency but under the presumption I don’t need the money otherwise and want to keep it reinvested. perhaps more importantly two things to consider. 1) is their initial cd interest rate/yield top tier when you took out that cd originally or did you give up yield vs competition for this flexibility. And 2) after you break this hypothetical cd what would you do with the money? Presuming you didn’t need it otherwise. Would this bonus plus a new cd yield give you a better outcome than just staying with the original cd?

My guess is both are costing you. You got an inferior rate at cd inception paying for part of the flexibility AND you would not be better off with the bonus with a new cd elsewise. If you can research and prove to yourself neither 1 and/or 2 is true then you may have a winner. I’d venture as a skeptic to think it’s not likely to be better.
I’m an asop fables kind of a guy. I’d rather have a bird in the hand than two in the bush. lol. But maybe there’s exceptions

NeilStanley | Feb 6, 2025 | 62 posts since 2013

No one is suggesting that there is somehow a windfall for the depositor if they withdrawal a high-rate CD today and put it right back into the bank.

I think the analysis you might be looking for is if I were to re-invest the net withdrawal amount of $101,062.97 and put it right back in the bank what would I end up at maturity if I booked a new account with the same maturity of the current CD. You would need an APY of 4.49% to have the same result as holding to maturity. That is disclosed right in the calculator. No one is saying that the bank is offering that rate today. The system informs the depositor of the "give-up" yield. This is exactly how the fixed-income securities market has worked for decades.

In other words, if you invest $101,062.97 at 4.49% from 02/6/2025 to 8/15/2026 you end up with the exact same $108,042.87 at maturity. Why wouldn't you want the choice as a depositor? This is not callable where the bank is terminating the account. This is about giving depositors fresh choices that don't harm the bank.

CDMD | Feb 6, 2025 | 141 posts since 2022

Sounds good. I was simply trying to assist in the analysis of whether the choice was a good option or not from purely an investment point of view. Hope I helped.

NeilStanley | Feb 6, 2025 | 62 posts since 2013

I greatly appreciate your engagement. It really helps to have thoughtful people share their initial responses so that the audience can address the pros and cons in an informed way. You can learn more at https://thecorepoint.com/redeemable-cd

NeilStanley | Feb 7, 2025 | 62 posts since 2013

The Redeemable CD introduces the principles that have been used in fixed income securities including U.S. Treasuries for decades to the classic CD. The "Give-Up" yield is the yield the counterparty has when the investor transfers over their position. The classic CD punishes the CD holder for early withdrawal regardless of market rates of interest or the term remaining on the account. With the classic CD the give-up yield is always greater than the coupon of the account.

The give-up yield for the Redeemable CD has market relevance. You can see from this recent example below that the give-up yield was 4.49%

Redemption Date: 2/6/2025
Maturity Date: 8/15/2026
Term to Maturity in Months: 18
Current Principal Balance: 100,000
Current Interest Balance: 100
CD APY: 5.15
Estimated Value at Maturity: $108,042.87
Replacement APY for remaining term: 4.49
Current Principal and Interest: $100,100.00
Current Account Redemption Value: $101,062.97
Instant Access Adjustment: $962.97 Bonus

In contrast the classic CD always has a give-up yield greater than they rate on the CD. So, if in this example the penalty for early withdrawal was 6-months of interest. Then the penalty for early withdrawal would have been $2,575 and the redemption value would have been $97,525. ($3,537 less than the Redeemable CD redemption value) and the give-up yield can be calculated to be 6.97%. This means that the bank would in this case would have a cash flow benefit of 6.97% via the classic early withdrawal penalty.

Why wouldn't CD holders demand better from their financial institution?

NeilStanley | Feb 8, 2025 | 62 posts since 2013

I don't find a calculator that depositors need to calculate the impact on their investment from early withdrawal penalties. So, here is a link to an Excel spreadsheet that you can use to calculate the impact of early withdrawal penalties https://app.box.com/s/ocuposih32mz20kwh2o8p7qhj9yugrwe

It calculates the "Give-Up" Yield or the APY Needed to Reinvest the Net Amount after Early Withdrawal to Maintain the Original Value at Maturity. In other words, it tells you what yield you need to stay equal to the value of your current CD.

Let me know if you find this helpful. Also, if anyone has seen this somewhere else, please point me to it. Seems like something CD owners should have been accessing long ago.

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