Guide to Callable Certificates of Deposit (CDs)

By Paulina Likos · June 14, 2022 · 6 minute read

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Guide to Callable Certificates of Deposit (CDs)

What is a callable CD? A callable CD is a certificate of deposit that pays interest like a regular CD, but can be “called” or redeemed by the issuing bank before the maturity date, thus limiting the return for the investor.

Investors who own regular CDs can count on getting back their principal, plus a fixed amount of interest, when the CD matures. But those who own callable CDs may not get the interest they expected if the bank calls the CD early.

Callable CD interest rates tend to be higher because of this potential risk. Here’s what else you need to know about callable CDs.

What Is a Callable CD?

A callable CD, like a callable bond, means that the bank has the power to terminate the CD before the maturity date. This typically happens if there is a drop in interest rates.

For example, if an investor buys a 2-year callable CD, the bank could close it out as soon as six months after it’s opened, or any time after that, at six-month intervals; it depends on the terms of the CD. The investor would then get back their principal and the amount of interest earned up to that point.

Note that only the issuer has the ability to call the CD early. The investor must leave their money in the CD until it’s called, or it reaches maturity, or they will face an early withdrawal penalty.

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How Does a Callable CD Work?

Callable CDs are similar to regular CDs, which are time-deposit accounts offered by banks and credit unions. These accounts provide a fixed interest rate on the funds the account holder has deposited for a specific term (usually a few months to a few years).

But unlike a regular CD, a callable CD has a “call” feature which allows the financial institution to decide whether it wants to stop paying the account holder the higher interest rate. At that point, the issuer can close out the CD and return the funds to the investor, plus any interest earned up to that point.

The bank typically offers a premium interest rate to account holders in exchange for the risk that the CD might be called.

Recommended: APY vs. Interest Rate: What’s the Difference?

Callable CD Example

Let’s say an account holder decides to deposit $10,000 into a callable CD that has a three-year maturity with a 5% interest rate. The bank, however, decides to call the CD after a year because interest rates dropped, and the bank can now offer CDs at a 4% interest rate.

In this case, the account holder would get their $10,000 back along with the interest accrued prior to the bank’s redemption of the CD: roughly $500 versus more than $1,500 the investor might have earned if they had been able to hold the CD to maturity.

Are Callable CDs FDIC Insured?

Yes. Callable CDs, like most types of CDs, are insured up to $250,000 by the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Association (NCUA), if the CD is issued by a credit union. If there is a bank failure, federal deposit insurance protects the money held in a callable CD up to that amount.

Maturity Date vs Callable Date

The maturity date is when the certificate of deposit reaches maturity and the investor can redeem the CD for the principal plus interest accrued during the length of the CD, and they can choose to take the earnings or renew the CD.

The callable date is the earliest date at which the CD issuer can close the CD. The first callable date can be as soon as six months after the CD was opened, and can occur any time after that, at six-month intervals (e.g. one year, 18 months, two years, and so on).

Be sure to read the terms of any CD, but especially callable CDs, as the callable date can vary. For example, you could buy a callable CD with a 5-year maturity date and a one-year callable date (the earliest date the issuer can call the CD). That means, at the very least your money would earn a year’s worth of interest.

Pros of Callable CDs

There are several advantages that come with opening a callable CD.

•   Callable CDs typically pay higher interest rates compared to regular CDs. Since account holders are taking on the risk of the bank redeeming the callable CD prior to its maturity, the account holder gets a higher interest rate in exchange for taking on this risk.

•   Like most CDs, callable CDs are relatively low-risk investments. If the bank decides to terminate the CD before its term, you will still receive the original deposit amount as well as the interest that accumulated until that time.

•   In the event of a bank failure, your money is federally insured up to $250,000 (unlike putting money in the stock market where your investment can significantly drop in value or fall to zero).

Cons of Callable CDs

While there are positives to callable CDs, these saving vehicles can have some downsides.

•   If the account holder needs access to capital and has to withdraw their money prior to the callable CD’s date of maturity, the account holder is subject to early withdrawal penalties which can eat up some or all of the interest earned.

•   In the event that interest rates decline, there is a possibility that the bank could call the CD early, in which case the account holder would not receive the same return they would have if the callable CD were to finish its full term.

Where to Open a Callable CD

If you have allocated money in an emergency fund and are looking for a lower risk savings vehicle to build up your funds, you can open a callable CD with a bank or credit union. The financial institution should be FDIC-insured National Credit Union Administration-insured so your money is protected.

The Takeaway

If you are looking for investments that are lower risk, provide predictable returns, and are protected by federal insurance, callable certificates of deposits might fit the bill. Callable CDs can take your savings to another level by paying a higher fixed interest rate for a specific period of time. The risk the account holder has to take is the possibility of the bank exercising the call option, and closing the account before the CD matures. Fortunately, account holders are compensated for this risk with a higher interest rate compared with regular CDs.

If you’re interested in earning a higher rate on your savings, consider opening an all-in-one online bank account with SoFi. You won’t pay any account fees or overdraft fees, and you can earn a competitive APY.

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What is a callable vs a non-callable CD?

Callable CDs are certificates of deposits that pay interest for a specified term like a traditional CD does, but the callable CD rate tends to be higher because the bank is allowed to redeem the CD before it reaches maturity. A regular CD does not have a call feature.

Why would a bank call a CD?

Usually, a bank would call a CD in the event of falling interest rates. In this case, the bank redeems the CD because with a drop in rates, the bank can then pay lower rates to its CD holders.

Can you lose money on a callable CD?

No, but you might get less money than you’d hoped. In a callable event, the account holder receives the principal along with interest that was accumulated up to that point in time, instead of receiving the return for the full term of the CD.

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