Term Deposits

What is a term deposit?

A term deposit is an investment account used to save money. Term Deposit accounts are similar to Savings accounts but have a few main differences.

If you open a term deposit, your intention is to earn interest over time on the money that you deposit. A term deposit’s interest rate and term length are fixed which means you are able to calculate in advance how much interest you will earn on your savings, regardless of fluctuations in the market.

The biggest difference between a savings account and a term deposit is that once you have deposited the money into your term deposit, you won’t be able to access these funds easily until the end of your contracted term. Once you have reached the end of this period you can choose to reinvest a portion or all of the funds at the interest rate stated by your bank, or you can withdraw the funds.

If you have some money that you know you won’t need for a while, a term deposit could be a good option for you. It removes the temptation to spend the money as a fee is charged if you want to withdraw before the term is finished.

What features should I look for in a term deposit?

The fixed interest rate is by far the most important aspect to consider when selecting a term deposit. This rate will determine how much interest you’ll earn on your deposit over the term of your account.

It is also important to consider the length of time (the term) that your funds will be locked and unavailable to you.

There are generally two categories of term deposits: short-term and long-term deposits.

Short-term deposits can be 1-3 months long, while long-term deposits can last many years. You will usually find that longer terms often come with higher interest rates than shorter terms, but always check with your bank to see what is offered by them.

You may want to consider the frequency that you’ll be paid interest on your term deposit. Term deposits pay interest in a number of ways: annually, semi-annually, quarterly, monthly, or at maturity (the end of the term). You may be allowed to choose which bank account to have the interest paid into.

Also look into the roll over (reinvesting funds from a security that has reached its maturity term) terms that your bank offers. Some term deposits will earn you extra interest if you roll them over immediately. Always check that you are getting the best offer you can.

Comparing term deposits

When comparing Term Deposit, you need only consider two things:

• The interest rate
• The term

While they also have advantages and disadvantages, most people will base their decisions on what interest rate they are receiving and how long they will put their money away for.

Do be mindful of automatic rollover policies and early exit fees, however what you really want is a product that suits your interest rate and term length requirements.

A Term Deposit calculator is invaluable in helping you work out how much interest you’ll earn.

How to assess Term Deposit rates

Low interest rates are great for home owners, but not so good for savings account holders.

In fact, low interest rates mean low returns on your savings, so that beach house or new car may take a little longer to save for.

Due to the low interest rate, currently a record low 0.25 per cent, Term Deposit rates are also at all-time lows. This is in contrast to Term Deposit rates being around 17 per cent in the late 1980s.

That doesn’t mean they are ineffective. It just means it will take you longer to make money. Bear in mind, however, that the more money you put into a Term Deposit and the longer the term, the bigger your return will be.

Of all of InfoChoice’s providers, each will have several Term Deposit products with varying rates.

That means you have a lot of products to choose from, including a wide array of differing interest rates.

For instance, ME Bank offers a 180 day base rate of 1.00 per cent for its ME Bank Business Term Deposit; Citi is offering a 90 day base rate of 0.70 per cent for its 3, 6, 9 or 12 month deposits for balances starting at $10,000; My State Bank has two products, one at 0.90 per cent (270 days base rate) and the other at 0.85 per cent (80 days base rate). Their 12 month online Term Deposit is 1.00 per cent.

The factors that influence the day to day interest rates of a Term Deposit include:

• The official cash rate – currently 0.25%
• Market competition
• Banking regulations
• The term of the Term Deposit
• The amount invested
• The interest frequency
• Early exists

Of course, when you take out a Term Deposit, your interest rate is fixed. You are locked into that interest rate for the entire term. So, whether the bank drops its interest rates or not, you will not be affected until your term has expired.

Do Term Deposits charge fees?

In most cases you won’t be charged any fees on your term deposit.

However, always be aware that penalty fees apply.

You will usually be hit with a penalty fee if you decide to access your money before the end of your term. Each lender charges a different amount so always check with your lender to see what the fees might be.

Can I withdraw money from a Term Deposit?

It is always possible to access your money from a Term Deposit but the purpose of having an account such as this is so you don’t easy access your money and let your funds grow. As such, your banks may choose to charge you a penalty fee.

To withdraw any money from your term deposit, whether it be the full amount or just a smaller portion, you’ll need to give 31 days notice.

You may be charged a penalty fee for early withdrawal and the interest rate on your term deposit may be reduced.

With most term deposits, if you would like to access your money before your term deposit reaches maturity, you will need to give 31 days notice. This is a bank regulation that came into play after the global financial crisis (GFC) when many financial markets found that banks didn’t have enough capital in reserve to survive an economic crisis. The 31 day rule allows the banks to hold onto the funds until they can find new sources of capital.

Advantages and disadvantages of Term Deposits

As with any financial product, term Deposits have their fair share of pros and cons:

Advantages

• Relatively low risk
• Can help you save
• Low maintenance

Disadvantages

• Access to your money is not easy
• Can help you save
• No benefit if variable rates rise

Let’s look at the benefits more closely.

What are the advantages of term deposits?

One of the biggest advantages of a term deposit is the relatively low risk associated with this type of financial product. Having a fixed rate means your money will be safe if interest rates drop and your interest earned will remain the same throughout the term of your account. In addition to this, there is the Australian government guarantee where deposits up to $250,000 in Authorised Deposit-taking Institutions (ADIs) will remain safe.

Term Deposits can help you save your money a lot quicker than a basic savings account would. The fact a financial institution offering a Term Deposit product will charge you a fee to access your money early, is a great deterrent for most people to keep their money in the Term deposit account.

Another potential benefit to Term Deposits is that you always know what to expect from the product and they are low maintenance. With the interest rate being fixed, you can guarantee exactly how much you will earn for the duration of your Term Deposit.

What are the disadvantages of Term Deposits?

One disadvantage of a Term Deposit is that you can’t access your money during the term without being charged a penalty fee. If you feel you need to access your funds before your term is up, you may want to look into putting your money into a savings account instead.

Another disadvantage, is that you are locked into a fixed rate. Therefore, if interest rates go up, you won’t benefit from this rate rise during the term of your account.

How do I apply for a term deposit?

Applying for a term deposit is similar to opening any bank account. However, you will need to take the following into consideration when looking into opening up a term deposit:

• How much money would you like to invest?
• How much interest would you like to receive on your deposit?
• How long a term would you like?

Once you have considered the above, you can start the process. Here are the steps to applying:

1. Use comparison tools

   Tools, such as the InfoChoice comparison tables and calculators, allow investors to search and compare the most competitive term deposit accounts for their financial needs.

2. Choose your Term Deposit

   Once you have compared Term Deposit products, you can select the term deposit that best suits you. You can usually make an application online, but some banks do prefer you go into a branch to set it up. It is usually easier to open a Term Deposit at a bank that you already have accounts with.

3. Verify your identity

   As with most bank accounts, you may need to provide proof of identification to the bank.

4. Make a deposit

   Once you have been approved, it’s time to deposit a lump sum into your term deposit so it can start to accrue interest.

How can I increase my Term Deposit earnings?

Once you have locked your money away in a Term Deposit, it isn’t that easy to make changes to that account so it’s best to do all your research before you lock it in.

One of the best ways to maximise your earnings is to find the highest interest rate possible. This is an easy, low maintenance way to know your money is working hard for you with no effort from you.

Another option is to choose a special term deposit that offers compounded interest rather than the basic general interest. Compounded interest means that you can earn interest on your interest, meaning you can make more money in a shorter amount of time. Keep in mind, these types of Term Deposits may not always have the highest interest rates.

How to compare Term Deposits

Finding a Term Deposit that suits your needs doesn’t have to be difficult. These are the things you should look for:

• A competitive interest rate
• A term length that suits you
• A minimum deposit that suits you

These questions are important when comparing term deposits:

• How often interest is calculated?
• Is the interest compounded?
• Are there any on going fees?
• What happens if I break the term of my deposit?
• Can I access my money without incurring a penalty?
• How much is the penalty?
• How often will I receive statements?
• Can I view my account online or via an app?
• When my deposit matures will it automatically roll over into another term deposit?

Compare term deposit rates based on duration

Comparing the different rates available is extremely important if you have a specific term length that you would like to lock away your savings for and earn interest over that time.
Term Deposits can last anywhere from 3 months to 5 years.

3 , 6 and 12 month Term Deposits

A 3, 6 or 12 month Term Deposit is a short to moderate term savings product and is great if you want to reach a smaller savings goal. Short-term Term deposits are also an excellent money saving tool: you can’t access your money and spend it on impulse purchases because it is locked away.

Your money is locked away for 3, 6 or 12 months and you receive a fixed interest rate.

The interest is calculated daily and paid to you at the end of the term.

You must give 31 days notice if you would like to access your funds, but if you do access the money you will be forfeiting some of your interest.

The longer your term deposit, the higher your interest will be. This means a 3-month term deposit won’t give you the highest amount of interest in comparison to longer terms.

An introductory savings account could also be worth considering for short to moderate term savings goals, however a savings account typically comes with a variable rate, not a fixed one, so you will be subject to fluctuations.

How do I compare 3, 6 and 12 month term deposits?

Here are a few things to consider when deciding on a bank for your 3, 6 or 12 month term deposit:

1. A competitive fixed interest rate

   Shop around and compare the different interest rates on offer. All banks offer a different rate. Find the most competitive one.

2. No fees

   Usually, the only fee applicable on a term deposit is an early withdrawal fee. Check what the penalty rate will be if you choose to access your money before the term is up.

3. A minimum balance you can commit to

   Most banks have different minimum deposit amounts. Some banks start as low as $500. Others are much higher. Find one that works within your budget.

   Tip: You cannot make additional payments into a Term Deposit once the duration is set.

4. Interest paid calculated daily

   With a 3, 6 or 12 month term deposit you will typically receive your interest earnings once the account reaches maturity. Make sure the interest is calculated daily so you can benefit from compound interest.

Advantages and disadvantages to 3, 6 and 12 month term deposits

Advantages

No monthly fee. There are no monthly fees or charges for account maintenance. This means your money works harder for you.

Helps you save. You are forced into saving as there is a penalty fee if you want to access your funds before your term ends.

Select how long your term will be. If you feel you only need a short amount of time, select a 3 month term deposit. If you know you can leave the money untouched for a longer period of time, go for a 6 or 12 month term.

You could get a competitive interest rate. The longer your term the more competitive your rates will be.

Disadvantages

No access until term deposit matures. Not only is there a penalty if you would like to access your funds early, but you must also provide 31 day before you can access your money. In addition to this, the interest rate may be reduced to a lower rate than a shorter term deposit has.

There’s a minimum balance requirement. The banks usually require a minimum if $1000 to deposit in order to open a term deposit.

Automatic rollover. Some banks will automatically roll the balance into a new Term Deposit when your term has ended. Let them know beforehand of your intention to withdraw the money at the end of your term. If you allow them to automatically roll it over, you may be locked in to a new term deposit with a lower rate.

Long Term Deposits

Long terms deposits are usually anywhere from 1-5 years and are ideal for Australians who are trying to save for major future financial goals.

With long term deposits you will be offered a competitive interest rate which is often calculated on your balance daily. You can choose the frequency that your interest will be paid, so you could select monthly, quarterly, yearly or only at the end of the term.

Always keep in mind, the longer your term is, the higher your rate will be. If you feel that you won’t need to access your funds, make sure to lock in your Term Deposit for the longest amount of time achievable.

As with all Term Deposits, you will need to pay a penalty fee if you access your money before your term ends. You will also need to provide 31 days’ notice to withdraw your funds, so you will not have immediate emergency access if you need it.

Advantages and disadvantages to long term deposits

Advantages

Flexibility. With a long term Term Deposit, you have control over how long the term is and when you will receive your interest payments.

No fees. There are no monthly service fees.

Incentive to save. If you access your funds early, you will need to pay a penalty which serves as an incentive to save your money rather than access it.

High interest rate. The longer the term, the higher the interest rate will be.

Disadvantages

No bonus interest. There are no introductory offers or bonus interest as you would find in a typical savings accounts offer.

Accessibility. If you access your funds early you will be charged a penalty fee. You are also unable to access the funds quickly in an emergency as you need to give 31 days notice that you would like to withdraw your funds.

Further risks of a long term deposit?

If your balance is less than $250,000 your savings are protected by the Australian Government Guarantee Scheme. However, keep the following in mind:

Term deposit roll-over. Once your term reaches maturity, the bank may decide to roll it over into a new account which may have lower rates. Make sure to let your bank know in advance if you would not like this to happen.

Early withdrawals. Not only will you need to pay a penalty fee if you withdraw any money earlier than your term finish date, but the interest calculated will be adjusted to meet the interest you would have received for a shorter term deposit, which means less interest for you.

Term Deposits versus savings accounts

Should you invest in a Term Deposit or a regular or high-interest savings account?

The answer to that depends on your needs at the time. The difference between the two is the ease at which you can access your money.

With a regular savings account, you can withdraw your money any time you like, usually without fee or penalty.

On the other hand, Term Deposits, penalise you for withdrawing early. If you pull money out of a Term Deposit before it has matured, it is likely you will see a reduction in your interest rate on the remaining balance. You may also be charged an amount of money equivalent to a portion of the interest already earned. If you think you might need to withdraw your money, a saver account is a better option.

A further difference is that a regular saver account will probably have a variable interest rate, contrary to the fixed rates offered by Term Deposits. If the variable rate goes up, this is good news for savers, however this can be unpredictable. A fixed rate gives Term Deposit holders predictability of rate and time.

Why the Product Disclosure Statement is important

All financial products come with Product Disclosure Statement (PDS) and it is absolutely imperative that you read it.

The PDS outlines exactly where you stand on all issues relating to the product.

If you have previously taken out a Term Deposit with the same bank, you may think the conditions will be the same. However, conditions do change and you need to be aware of what changes have occurred.

Read the PDS to avoid any major surprises and pay particular attention to maturity conditions, prepayment penalties and any associated fees belonging to the Term Deposit.

The overall return on investment for a Term Deposit will be affected by any fees you pay, whether at setup or at maturity.