Add-on CDs: Not just for pessimists

Piggy bank family under red umbrella

As a deposit account enthusiast, I’m constantly on the lookout for unusual CD deals — even ones that may, at first, seem counterintuitive.

Take add-on CDs.

Add-on CDs have many features in common with conventional CDs — a fixed interest rate, a set maturity date, early withdrawal restrictions and automatic renewal.

An add-on CD differs from a plain-vanilla CD, however, in providing the customer the right to make additional deposits during the CD’s term (although minimums and maximums may apply).

The add-on CD is designed to hedge against a decline in rates.

Now, if you’re absolutely, positively convinced that rates will go up near-term (as many, including me, now believe), an add-on CD makes no sense.

Right? Well, that depends.

Last spring, Androscoggin Bank in Lewiston, Maine offered a 24-month, 2.00% APY online CD. The bank required a minimum opening deposit of $500 and additional deposits of at least $100 at any time until seven days prior to maturity. There was no maximum.

Although I thought at the time that rates were sure to climb, I couldn’t resist the 2% yield (very competitive then) and the pittance required to establish the account.

I opened three of these CDs — one with no beneficiary and two POD accounts.

The rest is history. The Fed’s zero interest rate policy and quantitative easing continued, and, contrary to my best thinking, rates declined further. By year-end, my add-on CDs had ballooned, as I moved money from CDs maturing at other banks to Androscoggin.

And, of course, by that time, the Androscoggin accounts were essentially 18-month CDs.
I’m not claiming any special skill here. I was lucky to have stumbled into this deal, which was only open for a limited time.

Besides, it’s hard to find add-on CD deals, particularly ones offering such favorable terms.

For example, in California, Santa Barbara Bank & Trust offers a 12-month add-on CD, permitting two penalty-free early withdrawals and a one-time step-up in rate.

But, last I checked, the initial APY was only 0.35%.

Even Androscoggin’s 16-month add-on online CD isn’t worth writing home about, offering a mere 0.70% APY.

Ridiculous to consider locking into such a pathetic return!

But, then again, who knows what Uncle Ben has in store for us long-suffering CD investors?

And, say, it’s only $500….