After many years of low interest rates, savers finally got some reprieve in 2018. But it didn’t last long. Interest rates headed back down in 2019. Other than in some periods in 2012-2013 and 2016, the 10-year Treasury yield now is near the lowest in the last 10 years!
The Fed was raising short-term interest rates but now it’s expected to lower rates. That’s bad news for the money you will add to your savings in the future. An add-on CD is a good tool for hedging that possibility.
An add-on CD is a CD that allows additional deposits in the future. You open the CD now with an initial deposit. The CD has a stated interest rate and a fixed maturity date. Between now and its maturity date, you can deposit more money to it. The new money will earn the same original interest rate. The entire sum in the CD will mature on the original maturity date.
Some add-on CDs limit the frequency or the size of the additional deposits. You may be able to make one or two additional deposits or you may be able to only add up to a maximum amount. Some add-on CDs don’t have any limits.
Most CDs don’t have the add-on feature. The ones that allow additional deposits usually pay a slightly lower interest rate than those that don’t have the add-on feature. However, if interest rates go down, the slightly lower rate today may look like a steal in the future. Then you will still have the option to add more money to the CD and earn a rate that’s no longer available elsewhere. If interest rates don’t go down, you don’t add more money to the CD and only your initial deposit is earning a slightly lower rate than otherwise.
For example, a Florida-based credit union GTE Financial offers a 5-year add-on CD at 3%. Membership is open to anyone who pays one-time $10 to a non-profit. You can open the add-on CD with $500 minimum deposit. The add-on CD has no limit on the additional deposits. The 3% rate is lower than the 3.5% rate currently offered by Navy Federal Credit Union. On only $500 minimum deposit though, the opportunity cost is only $2.50/year, before tax.
You will lock in the 3% rate and have it available to you in the next 5 years. Moving forward one year, if the best rate elsewhere on a 4-year CD is higher than 3%, you go for the best rate elsewhere. If the best rate is lower than 3%, you add your new money to the add-on CD.
Specific offers come and go. Other banks and credit unions besides GTE Financial also offer add-on CDs.
Interest rates go up and down. As savers, while we all hope rates will go up, we can’t rule out the possibility that rates will go down, and possibly stay down for an extended period of time. Having an add-on option will be very valuable in those cases while acquiring that option costs nearly nothing.
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I’m wondering if any other banks offer add-on cds. I don’t see any in a web search. GTE doesn’t have the best customer service or safe and sound score.
Harry Sit says
I have been a member of GTE Financial since 2017. I don’t have any issue with their customer service. I have no concern for their safety or soundness either.
Peter H says
Great tip Harry. The add-on is a valuable option in this rate environment. I opened an account at GTE this morning. Very smooth process and the $10 contribution was waived. You do need to also fund a “member-owner share account” with $5. This happens automatically.
Whoops…. Maybe not such a good idea to use the 3% credit union….GTE Financial Reviews: 65 User Ratings
Some terrible reviews about how it treats customers.
In fact if you Google
reviews of GTE financial credit union in Florida
the picture at other review sites is not encouraging. I do like to get a good yield, and don’t insist every investment a make be so squeaky clean that the Pope would approve, but also I do have SOME standards of what business practices I’m willing to implicitly condone with my dollars.
Too bad, as this otherwise seems a good hedge.
Harry Sit says
This post is about add-on CDs in general. The specific product from GTE Financial is just an example. It’s not the only place that offers add-on CDs. That said, I have zero issue with GTE Financial in my two years as a member, or in opening a 5-year add-on CD with them this month. If you don’t like GTE Financial but you still like an add-on CD, just find one from a different bank or credit union you like better.
Harry…. I don’t doubt you had no unfavorable experiences with GTE, nor that that I would have any. Particularly given the limited and simple use I’d make of it. There are favorable reviews. But the number and proportion, and nature of, the unfavorable reviews is IMO very significant. My concern wasn’t so much fear of getting burned but unease to support a business with a arguably unfavorable customer support culture. You know a business’ nature, not when everything is clicking along normally, but how it responds when there’s a glitch or problem.
Thanks for reminding me GTE isn’t the only place offerring add-on CDs.
Financial Freedom Countdown says
Harry, I agree with you that we must plan for these low rates will persist for a while. I came up with a strategy to earn high risk free return initially on my emergency fund and now expanded it to the bond portion of my portfolio as well.
I’m curious how the other poster got the $10 donation waived?
They asked how I qualified as a member. There is a financial education group to join that confers credit union membership for $10. I clicked on that and then it said that fee was waived.
As of 9/30/19, GTE just reneged on the add-on feature for its CDs.
It’s my understanding that if the terms of a CD are changed, the credit union must provide membership with at least 30 days advance notice of the change.
Apparently, they are telling people over the phone about the change and refusing to allow any additions beyond 6K per year instead of the unlimited amount agreed to.
In my opinion, the legality of refusing additions before the 30 day notice goes into effect is questionable. And, I would think something of this nature would have to done via a formal document – not over the phone.
If you get formal notification of this change, file a complaint with the NCUA. This is probably going to an exercise in futility. The NCUA has let credit unions off the hook in the past by stating the continuing the add-on feature would put the health of the entire credit union in jeopardy.
Harry Sit says
According to Ken Tumin at DepositAccounts.com, GTE Financial reversed their poor decision of trying to renege on the established terms.
I was able to join Navy Federal without proving veteran connection; I just said my grandfather was in the Navy. I wish I had known they wouldn’t really require proof because then I wouldn’t have wasted a month getting his WWII-era DD-214-equivalent out of the Navy Archives. I missed the 3.5% rate since they lowered it to 3.25% and then 3% since this post.