Future proof your savings against interest rate movements.
Term deposits could be great for those who are serious about saving. A term deposit is a form of fixed savings account where you start by depositing funds into your account. While your funds are in the term deposit account they will accumulate interest. After your term is up, you can withdraw your money and the interest you earned. Most banks, credit unions and building societies offer these accounts, making it relatively easy to establish one and start saving.
It's important to note that as soon as you've locked away your funds, there could be a penalty for accessing your funds before the fixed term. Unless you're entirely sure that you'd like to commit to a term deposit, you may be interested in a high interest savings account instead, as they're more flexible.
Term Deposit Rates ComparisonRates last updated October 22nd, 2014
Business Term Deposit Rates ComparisonRates last updated October 22nd, 2014
High Interest Saving Accounts ComparisonRates last updated October 22nd, 2014
What is a term deposit?
A term deposit is a relatively low-risk form of investment. It’s a form of savings account that usually has a higher interest rate than a regular savings account. Before you enter into a term deposit, you will get a fixed interest rate for the duration of your term deposit. Term deposits are a great way to save for a particular goal, whether it be a holiday or a car, allowing you to put your money away where you can’t touch it but you can gain interest at the same time.
How do they work?
Term deposits are typically locked in for periods of between one and five years. You have a fixed interest rate locked in for security over the life of your deposit. After your term is over, you can withdraw your money (principal and interest) or reinvest it back into a term deposit. However, if you withdraw your funds from your term deposit early you will be hit with a penalty, so it’s best to ensure you won’t need to withdraw your money during the term. Term deposits also tend to have a minimum you can invest. Most banks will require you to deposit at least $1,000.
Michelle opens a term deposit
Michelle has just started working full-time and she wants to start saving for a home. She’s always dipping into her savings by making impulse purchases on things she doesn’t need and wants to take the temptation away. Michelle is currently renting and knows she probably won’t have the money to buy her own house until at least five years from now. She realises she needs another $20,000 for her deposit but she knows she will struggle to get there with her current spending habits.
Michelle starts doing her research and realises that a term deposit could work well for her. She checks out a few banks and financial institutions to see what her options are. Michelle knows the more money she puts into her term deposit and the longer she can keep it in there for, the more she will get from it. Michelle compares all the term deposits available and finds one with a high interest rate. Michelle puts in $10,000, the majority of her current savings but an amount which leaves enough money in her account for everyday expenses. She works out how much money she can get through her term deposit and selects an account with a five-year term length. Opening up the term deposit meant that Michelle didn’t throw away her money, didn’t have to do anything during the term and is now closer than ever to having enough for a deposit on a home.
How to compare term deposit accounts
Most Australian financial institutions will offer a form of term deposit account. Many will even offer more than one type of term deposit. This is also why you need to know what you are looking for in your comparisons, to ensure that you make your comparisons as easy as possible, and you track down the account which is right for you.
- Decide on your term and then compare term deposits.
Some financial institutions want to attract long term term deposits, and others prefer to facilitate short term investments. Therefore, before you choose a term deposit, you need to choose your term as one financial institution may offer 4.50% on a six month investment, where another will offer you 5.50% for that same term.
- Compare based on your investment amount.
This will allow you to make comparisons on a level playing field because many term deposit providers will tier their interest rates based on the deposit amount. Therefore a six month term deposit of $5,000 may earn 4.50% while a six month investment of $20,000 may earn 5.50% and you can save a lot of time in your comparisons by comparing based on what you can afford to invest.
- Find out about fees.
You don't want to plan for a big return on your term deposit investment only to find that there are monthly fees, fees to open the account or fees at the end of the term. It is possible to find a term deposit account without any of these fees so it’s worth making the comparisons. While you are comparing term deposit account fees, also find out what you are charged to leave the term early, if an emergency does arise and you need access to your funds sooner than expected, some financial institutions will charge you a percentage of the investment, where others will have a set cancellation fee.
- Consider an online term deposit account.
Saving and investing your funds is something you have to do amongst all of your other commitments and if setting up and managing a term deposit account costs you time, is it really worth the returns? Instead choose an online term deposit account which can be opened online, where the statements can be viewed online or emailed to you and you can reinvest or cancel your investment through internet banking.
Pros and cons
- Stops you from accessing your funds.Many savers complain about the temptation of using their money to make impulse purchases. With a term deposit, your funds are locked away so you won't do any unnecessary spending.
- Locked-in rate.Your interest rate is locked in for the duration of your term, providing you with much-needed security. You can also work out how much your deposit will grow and determine how long you need to keep your deposit locked up to achieve your financial goals.
- Plenty of choice.Term deposits allow you to select the length of your term and select how much you want to put into your account (as long as you meet the minimum amount). This will help you tailor your term deposit to help you reach your goal.
- Possibility of negotiating.If you are investing a large amount of money, you can sometimes negotiate with your financial institution for a better rate.
- Government guarantee.Term deposits taken out with an Australian Deposit-taking Institution (ADI) up to the value of $250,000 are guaranteed by the Australian government.
- Penalties for withdrawing.Sometimes unexpected expenses come up in life and you need money immediately. Term deposits usually enforce a penalty for withdrawing your funds and you will lose some of your interest earned.
- Lack of flexibility.Some online savings accounts can offer you an equal or higher interest rate than term deposits and have a lot more flexibility. These online savings accounts often allow you to withdraw whenever you need to without penalty.
What are the risks involved?
It’s important to ensure you don’t go beyond your means and don’t deposit more money than you can afford. To achieve the full potential of term deposits, it’s essential you don’t withdraw before your term is over—so only put in what you know you can afford. It’s also important that you compare the other options out there, such as online savings accounts, because they can sometimes offer you a better rate with more flexibility. Term deposits aren’t for everyone, so make sure they suit your needs before committing.
Frequently asked questions
Do term deposits have fees?
Some term deposits may charge you account-keeping fees. Each term deposit account is different, so make sure you compare the fees charged on each offering.
Can I get a variable rate for my term deposit?
No, term deposits only have fixed rates. Online saving accounts, however, do have variable rates available.
What happens if I need access to my money before the term ends?
This will depend on your institution. Some banks will reduce the interest you earn, while others might charge a fee. Check out our guide to cancellation costs for more information.
Do I have to do anything during my term deposit?
You don’t have to do anything during your term deposit. Your term deposit will be completely taken care of by your financial institution and you don’t need any investment experience to open a term deposit.