Term Deposits
A term deposit can offer you security and peace of mind with your cash investment while guaranteeing your rate of return.
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Compare term deposits
If you’re looking for a safe, effective way to grow your savings, a term deposit could be the right option to suit your needs. Find out everything you need to know about the most attractive term deposits in the country to take the guesswork out of comparing and selecting the best option for your savings.
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$0 Set up and no ongoing account-keeping fees. Interest rate depends on balance amount. Optional 3,6,9 or 12 month terms. Balances from $10,000.More details |
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More on term deposits
What are term deposits and how do they work?
Term deposits are a type of cash investment that banks and other financial institutions offer as an alternative to savings accounts. Their key drawcard is because they are a cash investment, they avoid the unpredictability of the property or share market. The agreed interest rate and set term of investment make term deposits a safe, simple, and easy way of investing your cash.
When you invest your money in a term deposit, you lock in an agreed interest rate and a set timeframe for the investment. The interest rate is set by the bank, building society or credit union offering the term deposit. Which interest rate you get can depend on how long you want to invest for, and how much money you’re looking to put away. Depending on the length of your term deposit, you may be able to choose if the interest is paid to you annually, at maturity, or more frequently over the life of the investment.
Most institutions allow you to hold a term deposit for anywhere from one month to five years. Once you reach the end of your agreed investment period, the term deposit is said to have reached ‘maturity’ or have ‘matured’.
What is the difference between a term deposit and a savings account?
Term Deposits differ from savings accounts in two main ways:
- The interest rate
A term deposit has a fixed interest rate. This means how much interest your savings earn is guaranteed to remain unchanged for the investment period. A savings account is usually on a variable interest rate, which means the interest you make on your money can move up or down as the financial institution changes its interest rates in line with RBA announcements.
- The money is ‘locked in’
Typically, with a savings account, you have access to your money so that you can add more funds to grow your savings balance, or equally withdraw your funds if you need to. A term deposit is different, because the amount you choose to invest is locked in and can’t be added to.
Also, because you have agreed to invest your money for a set period of time, you can only access the funds by providing up to 31 days' notice. You will often incur a penalty fee for early withdrawal, and may have the interest rate reduced too.
How is interest calculated on term deposits?
Term deposit interest is calculated using the interest rate agreed upon, the amount of money deposited and the length of time it’s locked in for.
The standard method of calculating simple interest on a term deposit is:
Interest = amount X rate % X number of days
invested per annum 365
For term deposits with a longer term, you’ll sometimes have different options when it comes to receiving your interest payments. Term deposit interest can be paid monthly, quarterly, half-yearly, annually or at maturity. You also have the option of choosing whether you would like to have the interest paid into a nominated bank account or added back into the term deposit balance. If you choose to add the interest to the term deposit amount, you are ‘compounding’ your investment.
Interest paid to you: With this option, you’ll have access to the interest paid to you, and you could receive this interest monthly if you choose, giving you a regular income. You’re able to spend the interest without breaking the term deposit. However, you will miss out on being able to grow your term deposit balance and access the benefits of compound interest.
Interest added back into the term deposit (compounded): You’re able to grow your investment without spending the interest. If you choose to have it paid frequently throughout the term, you’ll also start to compound your interest —this means, growing your balance, then earning interest on the higher balance every time interest is calculated and paid.
Are there any fees on my term deposit?
Yes, but only usually one – accessing your funds early will incur a fee. When you invest your money in a term deposit, you enter into an agreement with your financial institution. They invest and lend money on a large scale, to earn a rate of return which is then paid to you as interest. Accessing your term deposit money before its maturity date is commonly referred to as ‘breaking’ the term deposit. By breaking your term deposit, you’re dishonouring the agreement you made and taking away funds for the bank or credit union to lend or invest.
If you choose to break your term deposit, you will generally need to provide at least 31 days’ notice. Further to your notice period, you will also incur either a fee (usually around $30) or an interest adjustment, or both, as a penalty. If you have less than 31 days until your maturity date, you may need to wait until maturity to have access to the funds.
When you access your term deposit early, the interest you receive depends on how much time is left on the agreed term. The interest is usually progressively reduced the earlier you break your term deposit. For example, if less than 20% of the term has passed when you break your agreement, the interest will be reduced by 90%. But breaking after 80% of the term has passed will mean your interest is reduced by only 20%. These figures are for illustrative purposes only and the amount your interest may be reduced depends on who your term deposit is with.
Although there are early withdrawal fees to consider, term deposits are otherwise known for being a no-fee investment option.
Are term deposits safe?
Term deposits hold a very strong reputation as one of the safest and most low risk investments. The term ‘no risk investment’ doesn’t usually exist in the financial world, because even storing cash under your pillow at night runs the risk of being lost, stolen or not keeping up with the value of money over time.
The safety of term deposits comes from being a cash investment. This means that you aren’t buying shares, or property, or any other form of investment that is subject to volatility. Further to this, the Australian Government provides a backup under its Financial Claims Scheme (FCS).
In the unlikely event that your bank, credit union or building society fails, the Financial Claims Scheme offers protection of up to $250,000 per account holder, per deposit-taking institution. The only way you could lose money in a term deposit would be if the bank and the government failed. This is extremely unlikely to happen.
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How do I compare term deposits?
Minimum deposit
There’s no point looking at term deposits that require a minimum deposit of more than you are able to invest. The lowest deposit amount on the market is generally $1,000, although there are others with minimums of $5,000 and sometimes higher. Find a minimum amount that you are comfortable with because once you’ve made your deposit it’s locked in.
Term length
Generally speaking, the longer the term, the higher the interest rate. Common term deposit lengths are 3, 6, 9 and one year, ranging 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. You might find a particularly high rate for a term deposit of 9 months with one provider, while a different provider could have the same rate for 6 months. It comes down to how long you want to commit to the deposit and what you’re intending to do with the funds once the deposit matures.
Interest rates
You’ll want to be on the lookout for the highest interest rate — that will give you the best return on your investment. However, be aware that if the term deposit charges fees, it ultimately lowers your return. For example, a term deposit with an interest rate of 3% may end up being more profitable than a term deposit with a rate of 4% with high fees.
Frequency of interest payments
How often you receive interest payments can make a big difference to your balance at maturity. If you choose to have your interest paid at maturity, you will miss out on the benefits of compound interest. For example, if your initial deposit is $5,000 and you are receiving interest monthly, each monthly interest amount is added to the balance and interest is earned on top of that interest. 1% interest paid monthly would mean in the first month you’d earn approximately $4, but the next month you would earn interest on $5,004 and so on. With compounding, your total interest earned will be higher than if you simply had the interest paid at maturity.
The pros and cons of investing in term deposits
PROS
Low risk
Without being beholden to any market movement, and as your money sits untouched, it’s one of the safer ways to increase your savings
Straightforward to understand
Term deposits are far from complicated: essentially, you make your term deposit, you leave it and it accrues interest
Set rate of return that’s guaranteed
A fixed interest rate means that you’ll be sure to receive return on investment in the form of interest
No upfront or ongoing fees
You won’t have to worry much about fees being charged to your on your term deposit
Government guarantee
Even if your financial institution fails for whatever reason, you’ll be guaranteed for up to $250,000 in your term deposit
CONS
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
Lower return on investment
Interest rates may only be marginally better than other cash investments you may have access to
Not easily accessible
If you need the money, you’ll have to pay a fee and give ample advance warning, as well as potentially lose out on interest, to access funds from your term deposit
No extra deposits
You’re unable to add any extra savings to your term deposit whilst it’s locked away
