Be aware of high-interest rate offers
Currently, several banks and scammers are tricking customers into signing up for poor offers by marketing high interest rates on savings or fixed deposit accounts.
Here are three traps you should avoid.
1. A high fixed-term deposit in combination with another account
Several banks are offering high fixed-term deposit interest rates if you also purchase another product (investment fund) from them.
Signing up for such offers is not worth it, as the investment funds can be expensive.
Here are the banks that are offering such deals.
- Deutsche Bank (4% pa for six months)
- Santander (up to 3.2% pa for six months)
- HVB (up to 3.0% pa for three months)
Example:
We'll take the example of the product Deutsche Bank is currently offering.
Deutsche Bank (DB) is currently offering 4% annual interest on a fixed deposit account. However, here is the catch.
- You must also invest in their investment fund.
- Put the same amount of money in both the fixed deposit and the investment fund.
The investment fund is expensive and charges the following fees.
- One-time setup fee between 1% and 5% of the investment amount.
- Annual management fees, typically 1.5% per annum or more
These fees offset your high-interest advantage.
Calculation
- You invest €10,000 in a six-month fixed-term deposit at 4% pa. You'll earn 200€ in interest over six months.
-
You invest the same amount (10k€) in the investment fund. The fees you will pay will be.
- Suppose the fund charges a minimum one-time setup fee of 1% of the investment amount. In this case, you'll pay 100€ in setup fees.
- Annual management fees are 1.5% of your investment amount. This will be 150€ per annum.
- You'll also need a trading account with Deutsche Bank for this combined offer. This will cost you at least €19.99/year if you're 30 or above.
- You earned €200 in fixed-term deposit interest and paid 269.99€ in fees. In short, the high interest the bank offered is eaten away by the fees you paid for their other product.
Alternative
- Open a fixed deposit with a bank that doesn't force you to buy another product. You can compare the banks here*.
- Open a free ETF savings account in a broker that doesn't charge an annual management fee. We find Scalable Capital*, Finanzen.net Zero*, Smartbroker+* among the best trading accounts in Germany.
2. Avoid foreign banks with high interest rates
The next category is the banks from other European countries, such as Spain, Italy, Latvia, etc, offering high fixed deposit rates.
These banks also offer 100,000€ statutory deposit insurance as it's regulated EU-wide. However, if the bank goes insolvent, the country should be able to intervene.
Thus, the country itself must have a good credit rating.
Unfortunately, countries like Spain, Italy, Latvia, Greece, etc. don't have good ratings. Thus, check the following before opening an account.
- Where is the bank located? Banks in countries such as Germany, Luxembourg, the Netherlands, etc. are fine as all these countries have an AAA rating.
- Does this bank offer 100,000€ statutory deposit insurance?
3. Be aware of scammers
Scammers like to keep up with the trend.
There are fraudulent websites that promise high interest rates to rip you off. The website looks professional and can deceive anyone.
Sometimes the fake offers are only slightly better than the real ones. This makes it even tougher to point out if it's a phony offer.
The financial supervisory authority BaFin is currently warning against the website "finanzweggmbh." According to BaFin, the website offers fixed-term deposits without authorization and falsely represents itself as a legitimate financial advisory firm based in Chemnitz.
If you're unsure whether a provider is licensed, you can check the BaFin company database.
Conclusion
The ECB (European Central Bank) will probably cut interest rates further this year to stimulate the stagnant European economy.
On the one hand, this is good news if you are planning to take a mortgage or a personal loan. On the other hand, this means a further cut in the interest rate that the banks offer for fixed-term deposits and savings accounts.
Thus, it's best to open a longer-term fixed-term deposit now and secure a good interest rate. Keep the points we mentioned above in mind when picking the bank.
