Barclays and Synchrony 5 Year CDs Offer Attractive Early Termination Terms

Author's Note: In late 2017, Synchrony changed the earlier termination fee on its newly issued and renewed 5-year CDs to 1 year simple interest from 6 months.

It is beginning to look like interest rates in the US may never rise. Yield markets are no longer pricing in a move by the Federal Reserve in the summer of 2015, and most believe that any move to raise interest rates is going to be very slow and deliberate and will not bring interest rates near historical norms for the foreseeable future. Low energy prices and global easing have removed any inflationary pressure. Yellen is very dovish.

Against this backdrop, depositors need to look for ways to earn more than the rates that online banks are currently paying (see the best rates here). Barclays Bank and Synchrony Bank both offer 2.25% APY online certificate of deposit (CD) products. As both CD products offer early termination fees of only 6 months simple interest, they essentially give a depositor the option to terminate the CD with very acceptable consequences when and if rates begin to rise.

Let's illustrate this with some numbers. Assume you put $100,000 into one of these 5 year CDs. Suppose that in one year's time rates have risen to a point where you are able to get a higher interest rate on a savings account or a short term CD than 2.25%. You would have earned $2,250 in interest on your CD, but in order to release yourself from the obligation to hold the CD for four more years until maturity, you would be responsible for paying $1,125, half of your interest, as an early termination penalty. The 1.125% that you will have effectively earned over the one year that you held the CD will outperform current online savings rates, and is just slightly less than the best one year CD rates (see these rates here).

And, if rates still haven't risen in one year, you continue to hold the CD until they do rise. And, if the US is the new Japan and rates never rise, you will earn more than twice as much interest on your cash over than next five years than you would earn by staying put in even the highest yielding online savings accounts.

Note: You may be able to earn a higher rate on a 5 year CD than those rates mentioned. Compare all five year CD rates here. Also, you may wish to check with other banks as some banks may offer still less onerous early termination fees.

Editor's Note: As of the middle of 2016, both Barclays and Synchrony were offering 5-year CD rates below those mentioned in this article. Additionally, Synchrony has now changed their teams and conditions so that 5-year CDs now have a 1-year early termination fee.