Why falling rates could make term deposits a smart move for Gen Z

There’s a perception that term deposits are a dated savings vehicle, especially among younger Australians. While Gen Z has shown a preference for more flexible and potentially higher-return investments, a closer look at the current economic climate and the nature of these alternatives reveals a strong case for revisiting the humble term deposit.

Why term deposits make sense now

According to the latest Australian Competition and Consumer Commission (ACCC) Retail Deposits Research, nearly all Australians (95%) reported holding a transaction account, and a significant majority (79%) had a savings account.

In contrast, only about 1 in 5 Aussies (19%) held a term deposit.

Additionally, term deposits remain far more popular among older Australians. The latest available NAB data found nearly one third (29%) of Aussies aged over 65 held a term deposit, compared with less than one in ten (7%) 18-29-year-olds.

The relatively low adoption of term deposits may be attributed to their perceived lack of flexibility and lower returns compared to other investment options.

However, in a rate-cutting cycle, term deposits can be a strength rather than a weakness. Locking in a fixed rate protects your savings from falling interest rates, while the “set and forget” nature can help to keep you disciplined and on track for long-term goals like a home deposit.

Conversely, the variable rates on high-interest savings accounts and other floating-rate products will likely fall as the Reserve Bank of Australia (RBA) continues to lower the cash rate. This makes a term deposit a powerful tool for securing a guaranteed return.

Term deposits vs. alternative investments

While the allure of higher returns from investments like stocks, ETFs or crypto is undeniable, they come with a level of risk and complexity that term deposits do not.

• Safety and security. Term deposits are an incredibly safe investment. They are not subject to market fluctuations, and your principal and interest are guaranteed. For a young person saving for a critical goal like a home deposit, this level of volatility is a big risk.
• Clear timeframes. Term deposits let you plan around fixed investment periods, so you know exactly when your money will be available. Unlike volatile investments, you can align them with specific goals without worrying about sudden market swings.
• Flexible access through laddering. By splitting your savings across multiple term deposits with staggered maturity dates, you can create a “ladder” that provides regular access to funds while still earning higher fixed rates. This approach balances security with liquidity, letting you tap some money when needed without breaking long-term deposits.

Explore beyond the Big Four

The ACCC's report also found that most term deposits are held with the Big Four banks – Commonwealth Bank (29%), ANZ (13%), Westpac (11%) and NAB (11%) – but sticking with a major bank isn’t always the best move.

Smaller banks and credit unions often offer higher rates to attract savers, meaning you could earn more interest without taking on extra risk. They may also provide more personalised service and flexible features, making them a smart option for goal-focused savers.

The best of both worlds

It is not a matter of choosing one over the other. A sensible approach is to diversify your savings strategy. A term deposit could be the bedrock of your savings strategy, providing a safe, guaranteed return for your most important goals. Then, you have the opportunity to allocate a smaller portion of your funds to higher-risk, higher-reward investments.