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Choosing an investment term: short or long term deposit?

If you’ve picked a term deposit to be your savings strategy, then the next big question is: how long do you want to lock your hard earned cash away?

Choosing an investment term will largely come down to personal preference - how you need to use your money, your saving style and how much room is left in your budget to give up access to a large chunk of your funds.

To help you decide whether a short or long investment term will work best for you, we’ve collected the details for you here.

What is a term deposit?

A term deposit is a fixed rate, fixed term investment - which means you lock your money away for a predetermined amount of time, to earn a predetermined amount of interest.

It’s a low risk savings strategy and also a good, low maintenance way to maintain a long-term savings plan. It can also be handy if you’re guilty of splashing cash around when your budget doesn’t really allow it. Locking your money away in a term deposit can be a great way to break that habit - the hefty penalty fee for withdrawing early might inspire you to keep your hands off your savings stash!

What is a short term deposit?

A short term deposit generally means one that lasts anywhere from 1 to 12 months. Usually, the investment terms on offer go up by months at a time, meaning you might be able to choose 2 months, 3 months, 4 months and so on.

Check out our guide for a full rundown of the ins and outs of a short term deposit.

What is a long term deposit?

A long term deposit, on the other hand, can last up to 10 years. Long term deposits tend to increase in yearly jumps, so you might lock your money in for 2 years, 3 years, 4 years, etc. Terms up to 5 years are the most common.

Head over to our guide to read up on the details of long term deposits.

What’s the difference between a long and short term deposit?

Mainly, it’s the length of time you’ll have to lock your funds away for. But there are a few other key differences that might affect which investment term is best for you. Here’s a side-by-side comparison:

Short term deposit Long term deposit
Generally offers lower interest rates Tends to come with higher interest rates attached
Good for short term goals, so if you’re saving to buy a new car in three months, or for a holiday in 6, this might be for you. Good for long term savings plans. Maybe you’re saving up a deposit to own your own home in five years time, or maybe you’re just setting up a savings strategy that will carry you through to retirement. Either way, a long term deposit could be just what you need.
Usually pays interest at maturity. You’ll occasionally find offers where interest is paid monthly, but it’s not very common. Payment frequencies are more varied. You can usually choose to have your interest paid at maturity, annually, six-monthly or monthly.
Shorter terms offer a little more flexibility, in the sense that when they end, you’ll have the opportunity to deposit extra funds, spend the money or choose a more competitive term deposit offer before investing for another term. You’re locked in for years, which can be a good way to ride out changes in the market and maintain a steady savings strategy - as long as you snag a good term deposit deal initially!

What do they have in common?

Although there are key differences between long and short term deposits that you’ll need to take into account when choosing an investment term, there are also some features that are the same. These are things that are pretty universal to all term deposit offers and include:

  • A fixed interest rate. As a low risk investment option, your term deposit will always come with a fixed interest rate, which you can lock in for a short or long investment term.
  • Early withdrawal fees. If you need to take money out of your term deposit before it reaches maturity, you’ll pay penalty fees, and your interest rate will likely be reduced. This applies to long and short terms, but you may find it easier to avoid early withdrawals by choosing short terms and then reinvesting if it turns out you don’t need the cash.
  • Minimum balance. Many term deposit offers come with a minimum balance requirement, often around $1,000. Some also have a maximum limit, which can be as high as $5,000,000.

Which will earn me more interest?

Generally speaking, a longer investment term will mean more interest simply because it gives your pile more time to earn, plus it will often come with a higher interest rate attached. But there are some other things, that can have an effect on your earning potential, including:

  • Deposit balance - generally speaking, the more money you put into your term deposit, the more interest you will earn. A large deposit locked away for a shorter term might ultimately earn more interest than a small deposit with a longer investment term.
  • Interest payment frequency - thanks to the effect of compounding interest, how often your interest is paid - mainly, whether it’s paid monthly or at maturity - might affect the amount of interest you earn. But the banks have thought of this one: you’ll get a slightly lower interest rate if you choose to be paid monthly, offsetting the effect of compound interest.

To crunch the numbers and see what effect different terms, deposit amounts and interest payment frequencies will have on your savings, check out our term deposit calculator.

What are rollover terms?

It’s important to keep an eye on your term deposit, long or short, to make sure you don’t accidentally end up with another investment term that you didn’t bargain for.

This is called a rollover term - if you forget to tell your bank what to do with your money when your term deposit matures, your money can roll over and be invested for a new term. This term often comes with a rock bottom interest rate and will be the same length as your original investment. To get out of it before that time is up, you’ll have to pay the early withdrawal penalty fee.

So whether you choose a long or short term, make sure you have a plan for what you’re going to do with your money when your term deposit matures.

What are my other options?

If you’re having second thoughts about whether a term deposit is the right strategy for your money, then you might want to take a look at a high interest savings account instead.

The interest rates are often comparable - especially if you snag a great introductory or ongoing bonus offer - and you’ll have a lot more flexibility with how you use your money.

Just remember - a savings account has a variable interest rate, which means the amount of interest you earn each month might change along with market interest rates. Because it makes your money more accessible, it’s also a savings strategy that relies on you being able to resist spending your hard earned savings!

How can I find a term deposit?

Ready to lock into a term deposit? Once you’ve made the call about whether a short or long investment term is right for you, make sure you have everything you need to open a term deposit. Then, there are a few easy steps to get started:

Head over to our term deposit comparison table to find the best deals available for long and short term deposits.

Read up on some of our term deposit customer reviews, to find out what everyday Aussies have to say.

Take our term deposit search tool for a whirl to get personalised results. Just plug in your deposit amount, desired investment term and location to have a list of term deposit offers applicable to you at your fingertips!

Maria Gil
Maria Gil
Money writer

Maria Gil writes across all of our personal finance areas here at Mozo. Her goal is to help you think smarter about money and have more in your pocket. Maria earned a journalism degree in Florida in the United States, where she has contributed to major news outlets such as The Miami Herald. She also completed a masters of digital communications at the University of Sydney. When Maria isn’t busy with all things finance, you can find her tucked away reading fantasy books. She is also ASIC RG146 (Tier 2) certified for general advice.

* Different interest rates apply to different amounts or different interest payment frequencies.

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