Key takeaways
- Term deposits offer greater certainty, while savings accounts often offer flexibility: a term deposit has a fixed interest rate for a set period, while a savings account usually has a variable rate and allows immediate access to your money.
- Access to funds works differently: with a term deposit, your money is locked away until the maturity date, while a savings account lets you add or withdraw funds whenever you need. Although you may risk forfeiting any bonus interest if you withdraw funds throughout the month.
- Each option suits different savings goals: term deposits may suit people with a lump sum seeking a predictable return, while savings accounts can work well for ongoing saving and quick access to funds.
What is a term deposit?
A term deposit is a type of deposit account where you lock away money for a fixed period of time and earn a fixed interest rate. With a term deposit account, you deposit a lump sum, and agree to keep that money in the account for a set term (the ‘term’), which might range from a few months to several years.
This means you can’t access the money until the term is up. In return, you’ll get a guaranteed rate of interest for the term you select, so you’ll know exactly what the return on your money will be.
Because the money is locked away for a set period, banks can often offer a higher interest rate compared with other accounts. However, it’s worth noting that if you withdraw money from your term deposit early, an interest rate adjustment will usually apply.
Key features of a term deposit
- Fixed interest rate: The rate is locked in for the entire term, so you know exactly how much interest you'll receive.
- Set period: Your funds remain in the account for a specific period of time, such as 3, 6, or 12 months.
- Interest payments: Interest is paid either annually or when the term deposit matures, or you may get interest paid monthly depending on the product.
- Minimum deposit: Most banks require a minimum amount to open a term deposit.
- Limited access: You generally cannot access your money before the maturity date without an early withdrawal or penalty fee.
In return for locking your money away, the guaranteed rate offers certainty about how much your savings will grow.
What is a savings account?
A savings account is a type of bank account designed to help you set aside money while earning interest over time.
Unlike a term deposit, a savings account usually offers immediate access to funds. This means you can withdraw or deposit money whenever you need to, making it suitable for everyday saving. Some savings accounts may also pay bonus interest when certain conditions are met, such as growing the account balance by the end of the month.
Many Australians use a regular savings account alongside a transaction account as part of a broader savings plan.
Key features of a savings account
- Variable interest rate: The interest rate can change depending on market conditions.
- Flexible deposits: You can add additional deposits whenever you like.
- Immediate access: Funds are available if you need quick access to your money.
- Interest payments: Interest paid monthly in most cases.
- Flexible withdrawals: No need to wait for a maturity date. However, you may risk forfeiting bonus interest if you withdraw funds.
Savings accounts can calculate interest using simple or compound interest, meaning you earn interest on both your savings and previously earned interest.
Term deposit vs savings account: key differences
While both accounts help you grow your savings, they differ in several key areas such as interest rates, flexibility, and access to funds.
Generally speaking, a term deposit is suited to people who can lock away funds for a defined period of time, while a savings account suits those who want more flexibility.
| Feature |
Term deposit |
Savings account |
| Interest rate type |
Fixed rate for the entire term |
Variable interest rate that may change |
| Access to funds |
Limited access until the maturity date |
Immediate access to your money |
| Ability to add money |
Usually no additional deposits allowed |
You can add funds anytime |
| Minimum deposit |
Often requires a minimum deposit |
Often lower minimum amount |
| Use case |
Saving a lump sum for a set period |
Ongoing saving and quick access |
| Be aware of |
If you withdraw money from your term deposit early, an interest rate adjustment will usually apply. |
You may risk forfeiting bonus interest if you withdraw funds. |
Which account type offers a higher interest rate?
Generally considered, term deposits tend to offer higher interest than standard savings accounts because the money remains locked away for a fixed period.
With a fixed interest rate, you know exactly how much interest you will earn over the term. This certainty can make term deposits appealing if you want predictable returns. By contrast, a savings account typically has a variable interest rate. This means that rates can increase or decrease over time. With both types of accounts, promotional interest rate offers may apply, so it can be helpful to compare current rates and account features before deciding which option suits your savings goals.
Can you add money to a term deposit or savings account?
Another key difference is whether you can add more money after opening the account. With most term deposit accounts, you make one initial deposit when you open the account. After that, additional deposits are usually not allowed during the fixed period. If you want to add more funds, you may need to open a new term deposit.
A savings account, on the other hand, allows flexible deposits. You can add more money to the account whenever you like and even set up automatic transfers as part of a savings plan.
What happens when a term deposit matures?
The maturity date marks the end of the term, when your principal amount and interest earned become available. When a term deposit reaches maturity, you have several options.
Typically, you can:
- Withdraw the funds to another bank account
- Allow the deposit to automatically renew for another term length
If you choose to reinvest, the interest rate applied may change depending on the current market rate.
Can you withdraw money early?
Accessing your funds before the term deposit matures is possible but may involve conditions.
If you withdraw money early, the bank may apply an interest rate reduction, an early withdrawal adjustment, or a penalty fee. Because of this, term deposit early withdrawals may reduce the total interest earned.
Some banks also require notice — for example 31 days notice — before accessing funds.
Which is right for your savings goals?
Choosing between a term deposit and a savings account often comes down to how you plan to use your money.
A term deposit may suit you if you:
- Have a lump sum to invest
- Prefer certainty around exactly how much interest you'll earn
- Don't need to access your money for a set period
A savings account may suit you if you:
- Want quick access to funds
- Plan to add regular deposits
- Are building savings gradually
- Need flexibility for unexpected expenses
For many Australians, using both can be effective. For example, keeping emergency savings in a savings account while placing extra funds in a term deposit for higher returns.
To sum up
Both a term deposit and a savings account can play a role in building financial security. A term deposit offers a fixed rate, predictable interest payments, and the potential for higher interest in exchange for locking your funds away for a fixed period.
A savings account offers flexibility, immediate access, and the ability to add funds regularly as part of an ongoing savings plan.
By considering your financial situation, your need for access to funds, and your savings goals, you can choose the option that works best for you.
