Written by Term deposits are a type of savings account that involves locking up a lump sum for a set period to generate interest. This can be for a short period of a few months or as long as five years. You can also decide how often your interest is paid (which we’ll get into in a bit). Once it reaches maturity (the end of your term), you can access your funds again and have all remaining interest paid to you.
How are term deposits different from a standard savings account?
Term deposits differ from savings accounts in two main ways:
Interest rates
Term deposits have fixed interest rates. This means the interest earned is guaranteed for the investment period. The interest rates on savings accounts are variable, meaning they can change in line with market movement and RBA announcements.
Access to your money
With a savings account, you have access to your money at all times. This means you can deposit or withdraw at any time. A term deposit is different, as the amount you choose to invest is locked in.
Also, because you’ve agreed to invest your money for a set period, you can only access the funds by providing up to 31 days' notice. You’ll typically either incur a penalty fee or interest deduction for early withdrawal.
How is interest calculated on term deposits?
The formulae used to calculate term deposit interest are as follows:
- (Amount deposited x interest rate) ÷ 365 = daily interest
- Daily interest x length of term in days = total interest
You can see how this works for a $2,000, six-month deposit at 3.00% p.a.:
- ($2,000 x 0.03) ÷ 365 = $0.16
- $0.16 x 183 = $30.08
However, several factors impact how interest is calculated on your deposit. These include:
- Your interest rate: of course, this is the most important variable. Financial institutions set their rates based on external factors like the RBA cash rate and market movement. The amount you deposit and the term you choose will also determine the rate they’re willing to offer.
- The size of your deposit: the more money you have in your account, the more interest you’ll earn. For instance, a $5,000, 12-month deposit at 3.50% p.a. with interest paid monthly would earn around $175, while a $7,500 deposit would net approximately $263 on the same terms.
- The length of your term: having your deposit locked away for a longer period means it’ll spend more time generating interest. Put simply, you can potentially double the amount earned by doubling your term length.
Are there any fees charged on term deposits?
The only thing you’d be required to pay is for an early break of your deposit term. However, the nature of this charge varies between providers. Here’s what you may need to pay:
Interest reduction
The most common penalty for breaking your term deposit early is an interest reduction. This reduction will depend on how far into your term you are when you decide to break it. Providers set their own schedules but, as of April 2025, ANZ, CommBank and Westpac all stick to the following:
| Percentage of term elapsed | Reduction in interest rate |
|---|---|
| Under 20% | 90% |
| 20% to 39.99% | 80% |
| 40% to 59.99% | 60% |
| 60% to 79.99% | 40% |
| 80% to 99.99% | 20% |
For example, if you had a $10,000, 12-month deposit at 4.50% p.a. that you decided to break after nine months, the calculation for interest reduction would be as follows:
- 274 days ÷ 365 days = 75.07% of time elapsed
- 75.07% = 40% interest reduction (multiply rate by 60%)
- 4.50% p.a. x 0.6 = 2.70% p.a. reduced rate
- ($10,000 x 0.027) ÷ 365 = $0.74 daily interest
- $0.74 x 274 days = $202.68
As you can see, the total interest you’d receive after breaking your term with three months to go is $202.68. This is compared to the $450 after 12 months if you didn’t break it.
Early repayment fee
On top of the rate adjustment, some term deposit providers will also charge an early repayment or service fee. While not as substantial a penalty as the rate adjustment, you could still be forced to fork out $30. You should always check the fine print before locking your money in.
How to compare term deposits
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Interest rates
This one is pretty straightforward. The higher the interest rate, the more you stand to earn on your savings. Take the time to look around and find the best available deals for the deposit size and term length you’re looking for.
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Minimum deposit
There’s no point looking at term deposits that require a minimum amount greater than you can invest. The lowest deposit amount on the market is generally $1,000, although there are others with minimums of $5,000 and sometimes higher.
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Term length
Common term deposit lengths are three, six, nine or 12 months, reaching up to five years. The longest term won’t always have the best interest rate, though, so have a look at all the options available when deciding how long to lock it in for.
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Frequency of interest payments
Think about how often you want to receive your interest. This will generally be monthly, annually or at maturity (the end of your term), though some may offer options in between. Some lenders may reduce rates for more frequent interest payments.
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Early withdrawal terms
You’ll want to be across what happens if you need to access your money early. Will you be hit with a significant rate reduction, service fee or both? Also, check whether you’ll be required to give 31 days’ notice to receive your funds.
The pros and cons of term deposits
Pros
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Low risk
Without being impacted by market movement, it’s one of the safer ways to increase your savings.
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Straightforward to understand
Term deposits are far from complicated: you make your deposit, you leave it and it accrues interest.
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Set rate of return that’s guaranteed
A fixed interest rate means that you’ll know how much you’ll receive by the end of your term.
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No upfront or ongoing fees
You won’t have to worry about fees being charged on your term deposit.
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Government guarantee
Even if your financial institution fails for whatever reason, your term deposit will be guaranteed up to $250,000.
Cons
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Unable to access rate rises
You could miss out on interest rate rises due to having locked in your rate at the start of your term.
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Lower return on investment
Interest rates may only be marginally better than other, more flexible options like high interest savings accounts.
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Not easily accessible
The money you store in your term deposit is difficult to access by design, so you’ll have to jump through hoops if you need it.
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No extra deposits
You’re unable to add any extra savings to your term deposit while it’s locked away.
Other frequently asked questions about term deposits
Each financial institution has different minimum deposit requirements, typically ranging from $1,000 to $5,000. Maximum deposits range from $500,000 up to $5 million or more. However, larger amounts can often be invested in a term deposit by special arrangement.
Most banks, credit unions and building societies won’t need you to be an existing customer or hold other products to have a term deposit with them. You’ll need to nominate an account to have your deposit debited and interest paid into.
In some cases, yes – you may receive your funds as soon as you break your term deposit. However, many providers will require at least 31 days’ notice. This means you’d be hit with a rate adjustment on top of not seeing your funds for the next month.
The interest that you earn on a term deposit is subject to income tax in the same way as any other savings interest earned. The financial institution may withhold additional tax from the interest if you don’t provide a Tax File Number (TFN), Australian Business Number (ABN) or if you’re a non-resident of Australia.
When you first set up your term deposit, the maturation date will be communicated to you. You’ll generally be able to check the details through an online portal. You will also receive correspondence a short time before maturity to ask you what you’d like to do with the funds. If you fail to act on this correspondence after your term deposit reaches maturity, it may automatically enter a new term, meaning you’ll have to pay a fee to access your funds.
