Term deposit benefits and pitfalls to know before you stash your cash

It’s understandable if you’re becoming increasingly cautious about where to store your hard-earned nest egg in 2020. The March RBA rate cuts and uncertain economic environment hasn’t been kind to savers, even with some banks recently giving term deposits a boost.

RELATED ARTICLE: All the recent rate changes you’ll want to know about for savings accounts.

So if you’re considering a term deposit as the new home for your savings, you’ll want to be very clear about the benefits of this fixed interest option, as well as any features that might sting uninformed customers.

Generally, if you’re investigating a term deposit, you’ll already have a lump sum which you’re looking to grow, and won’t need to dip into anytime soon. If this is you, read on for Mozo’s expert assessment of term deposits, as well as comparisons of term deposits from banks and other lenders.

Term deposit benefits

Market slumps won’t affect your savings. That’s the beauty of a fixed rate – as long as you see out the term, you’re guaranteed to receive the returns you signed up for, so it’s perfect for cautious savers.

It’s low maintenance. Because you aren’t required to meet any deposit or transaction conditions, you can simply set and forget a term deposit. You’ll reap the benefits as interest earnings roll into your linked transaction account monthly, or as a bundle once the term matures.

You can wave goodbye to fees. Term deposits generally don’t have any startup or ongoing fees, and as long as you don’t withdraw early, you won’t encounter any other costs.

It’s government guaranteed. Like any deposit up to $250,000 secured in an Authorised Deposit-taking Institution (ADI), term deposits will be reimbursed by the Australian government in the unlikely event that the bank goes bust. ADIs include all banks, credit unions and building societies licensed by the Australian Prudential Regulatory Authority (APRA). Hint: All term deposit providers in the Mozo database are ADIs. 

Term deposit pitfalls

Your dosh isn’t accessible. This is particularly important information during times of economic instability. If you need to withdraw money from a term deposit before maturity, you’ll see a rate reduction and get hit with a penalty fee. Avoid this by being 100% sure your costs can be covered by other sources and savings before starting the account.

Rates may not be as high as you think. Term deposit rates depend on timeframes, so don’t confuse the highest advertised rate with what you’ll receive if you are committing  to a different term. Also watch out for revert rates that may decrease once the term is up, and reduced rollover terms if you forget to collect your deposit upon maturity.   

You can’t make extra deposits. So if you’re just starting out on your savings expedition, a term deposit probably isn’t the right fit for you while you build up that lump sum.

You’ll miss out on any rate hikes. While your locked-in rate will save you from market downturns, it naturally means you won’t benefit from increased interest rates like you might with savings stashed in a variable account.