Best Time to Lock in a Term Deposit?

A term deposit holds a sum of money in an account for a specified period of time. These terms can last anywhere from thirty (30) days to five (5) years. Generally, the longer the term you choose, the better your return will be when collecting on the interest rate. In order to choose an optimum time to enroll in a term deposit, it is imperative to understand the cycle of interest rates in Australia. With a term deposit, your interest rate is fixed for your designated term. From the day you open your account, and every day until the end of the term you have chosen, your investment will be earning exactly the same interest rate.

Term deposits are a safe investment because the interest rate guarantees your sum will grow. Your returns are not dependent on decisions you make about the share market or on what the RBA decided to do with their official cash rate this month, you know your interest rate is guaranteed, making a term deposit a safe and secure investment.

Since the GFC occurred in December 2009, banks have been competing with each other to gain new accounts. The result of this competition is quite favorable to investors as banks are offering some of the highest interest rates in years. As of January 2012, UBank has one of the best interest rates on the market: 6.11% for a six (6) month term. Many other banks are offering well above the 5.50% mark as well. Of course, these rates won’t last forever. As soon as the global economy begins to stabilize, interest rates will drop.

Deciding the best time to put your money in a term deposit depends on several factors such as how long can you keep the money in account, how quickly you might need to access funds or any potential penalties incurred should you need to make an early withdrawal. Knowing your own financial allowances and limitations will help you make the most informed (and profitable) decision.

For example, the highest interest rates are usually offered on the longest terms where you have invested a large amount and chosen to have your returns paid at maturity. However, this does not mean the best term for you is the longest one offered, and nor should you simply invest all of your savings in a 12 month term deposit, if you are going to need to pay those monthly or quarterly expenses soon. Instead, you may choose to channel the majority of your savings into a short three month term deposit where you can earn guaranteed interest, but have access to your funds again in the near future. Or you may be able to take advantage of the often higher six month term deposit rates to keep your savings safe.

How To Choose The Best Time To Lock In Your Term Deposit

Although term deposit investments require minimal input from you (other than the money itself), you don’t need to be a financial genius, just a savvy shopper to have a profitable return. Here are a few tips to help you know when it is the best time to lock in your term deposit:

• Keep a watchful eye on interest rates. You don’t need to know the intricate details of all the market forces which influence the rise and fall of interest rates, but you do need to know where the current cash rate stands, where it is predicted to go in the near and long term future and where on the interest rate cycle we are right now. Look into past rates to see if rates are on the rise, falling, or staying the same.
• Understand interest rates rise and fall in cycles. Interest rates always have and always will go up and down and you will notice the effects of this cyclic movement when you become involved in long-term investments. Therefore, if you are looking at investing for a long term, two years or more, avoid doing so when interest rates are at their low point. When interest rates rise again (and they will), your investment will be locked in at the lower rate.
• Research what the banks are reporting. The banks and financial institutions offering term deposits have the inside track on financial experts’ thoughts and interest rate predictions. Therefore, look at where the banks are suggesting you lock in your money. Often a six (6) or twelve (12) month term deposit account will have the same or a similarly attractive interest rate as a five (5) year investment.
• Don’t automatically reinvest in the same account at maturity. Some term deposit accounts allow you to automatically roll over your investment amount into a new term deposit. Sure it’s convenient, but in the time you money has been sitting in the account, interest rates could have risen. Reenrolling in the same account earning the current interest rate may not be the wisest investment, so don’t be afraid to shop around for a better rate.
• Lock in at the best rate and be ready to move when it gets even better. Since we are just moving out of the bottom of the interest rate cycle, choose to lock in a term deposit for just six (6) or twelve (12) months to see how quickly rates rise in that time. As mentioned, you can find a six (6) or twelve (12) month rate to rival some five (5) year term deposit rates if you shop around. Then in a year’s time, rates are likely to still be on the rise and you can lock in your investment in a new term deposit at the new higher rate.

For more information or to make your own comparisons on the best term deposit interest rates available right now, use the Savings Account Finder™ comparison tables here. You can then follow our secure links to start your term deposit application today. Don’t miss the chance to lock in a great rate now.