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What is a Term Deposit?

Although term deposits are similar to savings accounts, there are some major differences.

With a term deposit, your money is invested at an agreed interest rate for a fixed period of time (the ‘term’). That means once you’ve put your money into a term deposit, you won’t be able to access it until the end of the term. In return you’ll get a guaranteed interest rate, so you’ll know exactly what the return on your money will be.

 

The amount of interest a term deposit earns depends on a number of factors such as the term selected, the amount being invested and whether interest is paid during the term or at maturity.

What are the benefits of a term deposit?

With a term deposit you’ll know exactly what the return on your money will be. In other words, term deposits offer a guaranteed rate of return for your chosen term. That means if market conditions change and interest rates drop, you’ll still benefit from the interest rate you selected (although if interest rates rise, you won’t be able to benefit). Another benefit of putting money into a term deposit is there aren’t any set up or ongoing fees.

 

Term deposits are generally considered a safe investment on the money you invest, as they don’t have the volatility of other investments such as property or shares – in fact if you take out a term deposit at a recognised Australian financial institution (such as Westpac), your term deposit is guaranteed by the government, up to a maximum deposit of $250,000.

 

Term deposits can be an ideal way to save money, as you won’t be able to touch your savings for the length of the term. In other words, term deposits can take the work out of resisting the temptation to dip into your savings – not to mention you’ll be earning interest as well.

What about any downside?

Perhaps the main downside with a term deposit is the barrier to getting to your money during the term selected (except in certain circumstances). Although there are circumstances when you can access your money early, you’ll generally have to pay an early withdrawal fee. Furthermore, you’ll likely have to give up to 31 days’ notice. It’s important you carefully consider whether you’ll need access to your cash during the length of your term deposit.

 

Changes in interest rates can sometimes go against you- should interest rates rise once you’ve locked your money into a term deposit - you won’t be able to benefit from the additional interest (the flipside of course being should interest rates fall you’ll still get the rate you agreed to).

Choosing the term

The length of time you can lock your money away in a term deposit can vary from as short as one month through to five years. As a rule of thumb, generally the longer the length, the higher the interest rate will be (although this isn’t always the case).

 

Term deposits are often divided into short and long term deposits:
 

  • Short term deposits are generally categorised as anything from one month to one year. You might want to consider a shorter length if you have a savings goal in mind (such as going away on a trip in the near future) and don’t want to lock your money away for a long time, while also removing the temptation to dip into your savings.
  • Long term deposits could be anything over 12 months (generally up to 5 years).  You might want to consider a longer term if interest rates are at a higher rate – you could then either benefit from a higher interest rate to grow your savings, or earn an income from the interest during the length of the term deposit.

How is interest paid?

With most term deposits you can choose to have the interest paid monthly, half-yearly, annually or at maturity (the technical term for when the term ends).  The frequency you have interest paid however is likely to impact the interest rate offered.

What happens at the end of the term?

When your term deposit matures, you can reinvest it into a new term deposit (with or without the interest earned), reinvest a different amount, or have the money deposited back to you.

Is a term deposit right for you? Some things to consider …

As with all investments, it’s important to think about your own situation. With a term deposit, here are some factors to weigh up:

 

  • What are your short and long term financial goals? Do you have a specific goal in mind such as saving for a home deposit, a car or a holiday, or do you want to earn an income from the interest you’ll earn? These factors will also influence what term would be appropriate for your needs.
  • Are you a disciplined saver? If you’ve got some money put away in a savings account or have come into some cash (a work bonus or tax return, for example), a term deposit could be a form of ‘forced saving’, as you won’t be able to access the money until the end of the term. On the flipside though, you’ll have to be sure you won’t need to access the money during the term.
  • What are interest rates like? Depending on market conditions, interest rates may be relatively higher or lower when compared to other savings products. If interest rates are up, you could benefit from locking in a favourable interest rates. Once you’ve selected a term though, you won’t be able to benefit should interest rates go even higher.

How easy is it to open a term deposit?

Once you’ve selected the term and the amount you want to put away, setting up a term deposit can be as easy as going online and opening it up in minutes. That also means you can open a term deposit at any time, as there’s no need to head into a branch during business hours.

Things you should know

This information does not take into account your personal circumstances and is general in nature. It is intended as an overview only and it should not be considered a comprehensive statement on any matter or relied upon as such.