When you’re trying to make the most of your term deposit interest, you’ll want to make sure you pick all the right options - and that includes choosing the right interest payment frequency. There are a few different choices available to you, but on either end of the scale are monthly payments and one single lump payment when your term deposit matures.
So which is the right one for you? Which one will earn you more of that all-important interest? Read on to find out.
The interest payment frequency of your term deposit determines when you’ll see the interest roll into your account.
On some term deposit offers you’ll have the chance to choose from a range of options for how often your interest will be paid, while on others, there will only be one choice. The options most commonly available are: monthly, six monthly, annually, or at maturity.
Not all payment frequencies are available for all terms - short terms generally pay at maturity, while long terms will sometimes have other options available.
So what’s the difference? Check out this comparison of some of the key points that might sway you one way or another.
|Paid monthly||Paid at maturity|
|Interest will be paid gradually over the life of your term deposit.||Interest is paid all at once when your term comes to an end.|
|Generally comes with a slightly lower interest rate to offset the compounding effect.||Will often come with a slightly higher interest rate.|
|Good for keeping you motivated - it will be a pick-me-up to see the interest roll in more often!||Is low maintenance - your money can be out of sight and out of mind until the maturity date rolls around.|
|You can elect to have the interest paid into your bank account each month for a boost to your monthly budget.||At the end of the term, you’ll have a nice plump bonus to add to your spending fund.|
The rules of a term deposit mean that if your interest is paid at maturity, you won’t get your hands on it until then. So if you decide to have your interest paid monthly, what happens to it? Generally speaking you have a couple of options.
Keep in mind, these options are not always available on every term deposit offer - some banks might only offer one way or the other.
Compound interest applies to heaps of banking products, including home loans, credit cards and savings accounts. It means interest piles up quicker, which is great for savings products, but not such a bonus for borrowers.
Basically, how it works for a term deposit is that the previous month’s interest is added to your balance, meaning you earn interest on it as well and bag some extra dollars.
For a full rundown of compound interest and how it works, see our compound interest guide.
Short answer - not really.
Although the effect of compound interest will usually bag you a few extra dollars in interest from month to month, banks have thought of that loophole and closed it on their term deposit offers by attaching a lower interest rate when you choose to have your term deposit interest paid monthly. This offsets the compounding effect.
It might only be a very minor difference - even as low as 0.01% - but it’s designed so that monthly interest payments won’t really earn you more money.
*Rates correct at the time of writing. To see today’s rates, visit our page on NAB term deposits.
As you can see from the scenario above, choosing to be paid at maturity can actually earn you more in interest, because the higher interest rate can offset the value of compounding interest on the monthly option.
Use our term deposit calculator to crunch the numbers and work out what effect these different interest rates and interest payment frequencies will have on your savings stash.
...is that whether you choose to have your term deposit interest paid monthly or at maturity, it probably won’t make or break your savings strategy.
What works for one saver won’t work for another, so there’s really no wrong or right answer to which interest payment frequency is better. If you need a regular boost to your everyday budget, monthly interest might be the right choice for you, but if you’re just looking for higher interest, being paid at maturity might be better. The important thing is to compare your term deposit options and work out which option suits your saving style best.
Here are a few extra pain-free ways to boost the interest your term deposit earns:
Ready to stick your money in a term deposit and start earning interest? Well then the first step is to find the best term deposit around. To do that, head over to our term deposit comparison page to take a look at some of the most competitive offers on the market. Then, narrow it down a bit by taking our term deposit search tool for a spin.