It’s About Time For Time Deposits
A few years ago when I was still in high school (this makes me re-think the use of the adjective “few”), I was encouraging my friends and classmates to pool our funds together so that we can invest our money in a time deposit account. I chanced upon a centerfold ad on Buy & Sell back then, displaying the requirements and interest rates of time deposit accounts of major banks. Would you believe me if I tell you that in 2000 (ehem, high school), banks were offering interest rates on time deposits of up to 9.75% p.a.? To put that into perspective, these days, a major bank like Metrobank will give you an interest rate of 1% per annum… if you invest 1 million pesos… and if you hold the money for 5 years… plus one day. I’m telling you, that money would be better off sitting somewhere else.
But that doesn’t mean that time deposits are no longer relevant. They still are quite a popular “investment” product for Filipinos. Technically they are still deposits. When you say “investments”, it entails risks of loss of capital. Time deposits, being deposits, are generally risk-free because the bank guarantees that you will get the face value of your deposit after the agreed upon term. The only risk you face is when you bank goes bankrupt, and you are still guaranteed up to P500,000.00 because deposits are insured with the Philippine Deposit Insurance Corporation. And with the Philippines’ tough banking regulations and conservative banking culture, your bank is not likely to go bankrupt as, let’s say AIG. Oops, that one’s already been bailed out.
So let’s talk about the basics of time deposits. As mentioned, time deposits are basically deposit products: you have a required amount to open, you have a proof of deposit, and you have a fixed interest rate. The key difference is the element of time. You would have to let the bank hold on to the money for a fixed period of time for it to earn interest. For you, this means that you cannot withdraw your money anytime you like. For the bank, this means that they can back more loans because they’re guaranteed that your cash will be kept there for a certain period and it adds to their capital pool.
To open a time deposit account, you have to meet the initial deposit requirement. Some go for as low as 5,000 pesos. What’s the maintaining balance and what’s the required balance to earn interest, you may ask? It would be the same as the initial deposit requirement. In essence, those concepts are not applicable to time deposits because you really just leave you money there until its time is up.
In exchange for your money, you will receive a certificate of deposit as proof of deposit. For some banks, this certificate is a negotiable instrument and can be used as collateral against a loan, for example. For others, the certificate is nothing more than a proof that you have a deposit with the bank. But don’t throw it out! When the term of your deposit expires, you would have to surrender your certificate to get your principal back, plus interest earned.
The interest on time deposit accounts is tiered and varies from bank to bank and from one bank category to another. Generally, the bigger the amount you deposit, the higher the interest you will earn. Also, the more stable a bank is, i.e. less risk of bank failure, the lower the interests are. This means that you will not get the same rate for your 10,000 pesos if you open a time deposit with BDO as compared to opening one with a rural bank.
Also affecting the interest on time deposit aside from the amount of money you put it and the type of bank you open it with is the length of time you’re holding the money in that account. This period of time is usually referred to as the term. Most of them are multiples of 30 calendar days (roughly a one-month period). So you’ll have time deposit terms fixed at 30 days, 60 days, 90 days, 120 days, 180 days, 270 days, 360 days, two years, up to five years plus one day. The longer you hold your money in that account, the higher the interest rate you get.
Like any other deposit product that earns income, time deposits are also subject to a withholding tax of 20% of the earnings but there is a special regulation exempting some five-year-plus-one-day term deposit products from taxation and other charges.
In my next article, I will be featuring time deposit products that are available in the market. Happy saving!