Should I take out a 6 month term deposit? Pros and cons

With interest rates sitting high, more Aussies are looking to park their savings in a safe place to help their money grow. One way people are achieving this is by taking out a short 6 month term deposit, but is it worth doing?

Why take out a short term deposit?

While taking out a term deposit for a shorter period won’t yield as high of an interest rate as a longer term, there are still a lot of reasons you may want to apply for one. 

For example, you may have a lump sum of money and were planning to use it as a home or car deposit but knew you wouldn’t need to touch it for half a year. A 6 month term deposit is a great way to let it grow while you wait for it to be used.

Alternatively, you may not have a specific goal and instead want to balance the risk of not accessing your cash for a while with the reward of high interest rates.

Are there any cons to term deposits?

Shorter term deposits usually have lower interest rates in comparison to longer term deposits. In this way, if you were only looking to maximise your interest rate, short term deposits may not be the most advantageous strategy. 

One of the overall disadvantages to taking out a term deposit is that it may not yield the same as a high interest savings account. Part of the reason for higher interest rates on savings accounts is that they have a variable interest rate so the banks can have them rise and fall accordingly.

Term deposits usually have no fee for signing up or maintaining your account, but accessing the funds before the maturation date will usually incur a penalty. Therefore, you cannot rely on your term deposit as an emergency fund and will likely need to dedicate another account for that purpose. 

What are the Pros?

While you may want to give regular deposits with a high interest savings account, term deposits are generally geared more towards lump sum deposits. However, as they can’t be accessed until maturation, a short term deposit may be more useful as a “deposit and forget” strategy. 

Term deposits tend to have lower interest rates in general, but the big advantage is that these are usually fixed interest rates. This means that, if interest rates were to drop, the fixed term on your interest will hold steady in comparison to a savings account’s interest rate which will typically move.

Term deposits are regarded as a safer investment option. Part of this is that even if your TD provider were to somehow collapse, Authorised Deposit-taking Institutions (ADI) issuing term deposits are backed by the Australian government for up to $250,000 per account holder.