Best Time to Lock in a Term Deposit?

A term deposit is a fixed deposit and as such a big part of your decision in choosing a term deposit investment is the amount of time you want to lock away your funds. As a general rule, the longer the term you choose, the higher the interest rate your investment will earn during that period, however, to choose a term for your term deposit you need to understand the cycle of interest rates in Australia, and make an informed choice about whether to choose a fixed term deposit and what that term should be, and which point of the cycle we are in now.

How to Benefit from a Term Deposit Investment

Term deposits are a very safe investment because they will only ever increase. Your funds are not invested in a managed share portfolio or distributed through the property market in the hopes you’ll make a gain in the long run. Instead, your savings and investments are locked safely away in a bank account where they earn a high rate of interest every single day – the same guaranteed rate on every single day too – and your investment will only ever go up. However, it is the choices you make as to the term and investment amount which will determine just how much that increase is.

Benefits of a term deposit:

• Your interest rate is fixed for your fixed term. On the day you open your term deposit account, and every day until the end of the term you have chosen, your investment will be earning exactly the same interest rate no matter what. 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.
• Your investment won’t go down. Once your term deposit account is opened you don’t have to worry about following the stock markets or constantly wonder which way the property market is going because your funds are safely sitting in what is basically a bank account and there is no risk your investment will go down.
• The greatest benefits come from the best term deposit account. The highest interest rates are generally 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 very soon. 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

While term deposit investments require minimal input from you, and you don’t need to be a financial genius to see your investment grow, it is still important that you know when to get in and when to get out of a term deposit, so following is advice to help you know when it is the best time to lock in your term deposit:

• Knowledge of interest rates will give you the power of an almighty dollar. 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. The advice below can get you started on your financial learning curve.
• 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. This is because as the cycle continues, interest rates will rise, but your investment will be locked in at the lower rate.
• The cycle of interest rates is on the rise. Before the Global Financial Crisis official interest rates in Australia were around 7.00% and during the country’s recovery period the rates dropped as low as 3.00% so with the cash rate currently 3.75% we are still on the way out of the bottom of the interest rate cycle.
• Take note of what the banks think you should do. The banks and financial institutions which offer term deposit accounts 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 or 12 month term deposit account will have the same or a similarly attractive interest rate as a five year investment. This is because interest rates are still on the rise now and offering 6.00% or 7.00% on a 12 month investment is likely to be in line with official interest rates in a year’s time, but they are not willing to offer more than that for a five year investment because the cycle will have begun to dip again.
• Don’t automatically reinvest at maturity. Some term deposit accounts allow you to automatically roll over your investment amount into a new term deposit, but you will be earning the current interest rate, not the one you had been earning, which may be lower.
• 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 or 12 months to see how quickly rates rise in that time. As we’ve already mentioned you can find a six or 12 month rate to rival some five 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, so you don’t miss the chance to lock in a great rate now.

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