What is a term deposit?
A term deposit is a low-risk investment strategy offered by major financial institutions - such as banks - which allow you to invest your money at a fixed interest rate for a predetermined period of time. As you are unable to access your funds without incurring harsh penalties, banks offer higher interest rates for term deposits than standard savings accounts.
How does a term deposit work?
A term deposit is essentially a locked bank account; you cannot freely access the funds, but they are securely held by a bank. They use both a fixed term and a fixed rate of interest - this makes them easier to compare than some other types of investments where variable rates can affect your forecasted profits.
Term deposits use compound Interest, which is applied at the fixed rate set out by the provider when you open the account. At the end of your term deposit - known as ‘maturity’ - you can either choose to withdraw the funds including the earned interest, or allow the bank to reinvest the amount into a new term deposit - known as a ‘rollover’.
A fixed rate won't change throughout the life of the term, allowing you to easily calculate your financial return on the term deposit.
Where to get a term deposit
To apply for a term deposit you will follow a similar process to as you would when applying for a standard bank account with your bank. Most banks will allow you to apply online using a quick and simple process, and will need to provide some basic details, including:
- Your personal details and identification
- A savings account or standard bank account - an account for the interest to be paid into.
- A minimum deposit amount- this will vary between banks, and could be anything from $500 upward, though generally will be a minimum of $1,000.
The minimum amount required for a term deposit will depend on which financial institution you apply with. There is also a maximum amount interest can be applied to - be sure to carefully research both when comparing term deposits.
What are the benefits of term deposits?
The main benefits of a term deposit are that they are simple, risk-free and easy for the average investor to utilise. You are not investing in companies or shares of any kind - it is a cash deposit and the bank rewards you for depositing the money in the form of interest.
Other benefits include:
- Very little risk of losing your money
- Fixed interest rates that earn compounding interest for the full ‘term’
- Your money is locked away so removes the temptation to spend it
- Can be a motivational product to support a savings strategy
- A simple, set-and-forget style investment
A term deposit offers a fixed return over a fixed period. If you’ll need to access your money before the maturity date, break penalties may apply, and you may find a savings account more suitable instead.
‘Government protection of balances up to $250,000’ - The Australian Government offers a Guarantee Scheme for deposits up to $250,000 (per customer, per bank or institution) to protect your term deposit.
How to compare term deposits
As with any type of investment, loan, or other financial product, there is no one-size-fits-all ‘best’ option. The best term deposit for you will be one most suitable for your current financial situation, how long you plan to invest the money, and many other factors. To find the best option available, you should compare:
- Competitive interest rates
- How interest is calculated and how often
- Minimum deposit amounts
- Ongoing fees, cancellation penalties, and early withdrawal penalties
- Maturity conditions - i.e. automatic roll-overs
Term Deposit Rates
Term deposit interest rates are often slightly more competitive than some savings accounts, as they allow you to lock in a set rate for the entire ‘term’ of your choosing. While some high-interest accounts may offer a higher ‘headline rate’, they are more susceptible to frequent rate-changes.
Generally, the longer you choose to invest your money in a term deposit, the higher the rate you will receive. Banks and credit unions reward customers with more interest in return for allowing them to hold your money for longer.
Term deposit rates are used to calculate interest on the balance, which is then paid at a frequency of your choosing. This is called ‘compound interest’. You can quickly see how much you can earn on a term deposit by using the Money.com.au Compound Interest Calculator.
You can often choose the frequency that interest is paid into your account, such as monthly, quarterly, bi-annually, or annually. Reduced rates may apply to interest payments made more frequently, and you may have to wait until the maturity of the term deposit to receive the full interest rate.
Compare Term Deposit 12-month Fixed Rates
|Term Deposit Provider||12-month Fixed Rate|
|RACQ bank term deposit||1.65%|
|Ubank term deposit||1.60%|
|Bankwest online term deposit||1.50%|
|MyState bank online term deposit||1.35%|
|CUA term deposit||1.55%|
|AMP term deposit||1.45%|
|ME term deposit||1.60%|
Term Deposit Durations
The duration of your term deposit is a crucial decision, as once you’ve agreed to the term you will be unable to add any extra funds until it matures. Quite simply, if you lock away money for 12 months, you cannot add another dollar until the 12 months is up.
One solution is to open another term deposit instead - but this doesn’t guarantee the same rate as you current deposit, and the amount you earn through compound interest will be diluted than if it were calculated on one, larger sum.
Compare Term Deposit Durations and Benefits
|Duration of Term Deposit||Suitable For|
|3 months||Short-term savings goals|
|6 months||Significant purchases you need to save for, such as a vehicle|
|9 months||Short-term savings growth on interest|
|12 months||Securing competitive interest rates on your savings|
|1 - 5 years||Mid-to-long-term savings goals, such as buying a house|
|5+ years||Long-term goals, such as retiring|
Minimum Deposit Amounts
Term deposit offers will often include a minimum deposit amount. This will vary, but generally will be in the range of either $1,000 - $5,000.
Compare Term Deposit Minimum Amounts
|Term Deposit Provider||Minimum Deposit|
|RACQ bank term deposit||$1,000|
|Ubank term deposit||$1,000|
|Bankwest online term deposit||$1,000|
|MyState bank online term deposit||$5,000|
|CUA term deposit||$5,000|
|AMP term deposit||$5,000|
|ME term deposit||$5,000|
Term Deposit Fees and Penalties
You can request to make an early withdrawal of your term deposit before the maturity date by notifying the provider. You may have to wait up to one month from notifying the bank to have the funds released, though this may be waived by the bank under certain financial hardship circumstances.
However, cancelling - i.e. breaking - your term deposit will likely incur significant fees and penalties. Before applying, it’s important to research what the cost will be to you if you cancel early.
- Investment penalties - Check that the bank doesn’t take a percentage of the original cash investment for any early cancellations. While sacrificing interest is one thing, losing original cash is another and unacceptable.
- Interest penalties - Find out if you don’t get any interest should you cancel early. e.g. if you earned 6 months worth of interest in a 12-month term deposit, do you sacrifice all of that if you cancel early?
Many banks will have an ‘interest rate reduction’ set out in their terms and conditions. For example, if the interest rate reduction is 1.50% per annum and the interest rate of your term deposit is 1.65% per annum, breaking your term deposit will mean a rate of 0.15% per annum is applied to the deposit.
Maturity conditions - i.e. automatic roll-overs
At the end of your term deposit duration - i.e. when your term deposit ‘matures’ - your bank may automatically roll over your money into a new term deposit. While this can be a simple way of letting your deposit mature again without needing to do anything, there are some possible negatives to consider if you let this happen.
An automatic rollover of your term deposit might mean your new rate isn’t as favourable, or the term might not be right for you. This can be especially difficult if there are break fees associated with your term deposit, as you can be penalised or trapped into not having access to money you were hoping to use earlier than the duration of the new term.
Are there alternatives to a term deposit?
If you’re looking to save money, there are many options available other than a term deposit. You may consider a savings account which can provide the same - if not better - interest rates, but your decision will likely come down to whether or not you need access to the cash at any time:
- If you are trying to budget but struggle with impulse spending: consider a term deposit
- If you trust yourself to never withdraw your savings: Learn how to get a high interest savings account
Money is easily withdrawn from a savings account, while a term deposit locks your money away. Lock away your main savings and use your savings account to grow your next term deposit.
Term deposits can be a fantastic, secure method to save money without the temptation of being able to access your funds. They are often best used as one part of a budget and savings strategy - alongside a savings account. Many people using term deposits are drawn to their low-risk, low-hassle structure.
Pros and Cons
Term deposit FAQs
Why do I always see ‘special term deposit rates’ when at the bank?
They want your money. It helps them add to their cash reserves. It’s cheaper for them to use deposits to lend out then borrow money from larger pools of credit worldwide.
Interest rates on large sums of money are negotiable with banks
Did you know that if you have a large sum of money, you can walk into your bank and discuss a better term deposit rate than what you normally get offered? Banks want large deposits and will do whatever it takes to get them.
Can my term deposit keep going after the initial term?
Yes, this is called rolling over. You can opt to have your term deposit roll over into a new term deposit after the end date. It’s advisable however to always shop around, if you simply tick the ‘rollover’ box when opening a term deposit, you will not be easily able to check your new interest rate come time.
What are the common investment durations for term deposits?
Term deposits can range in duration from 3 months up to 5 years, with common investment periods including:
- 90 days (3 months)
- 180 days (6 months)
- 1 year
- 2 years
- 3 years
- 4 years
- 5 years
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