What are term deposits?
Are you looking for a place to stash your cash that will earn you high returns and protect you against rate movements in the market? Then a term deposit could be just for you!
But what exactly is this banking product? To put it simply, a term deposit works just like a savings account, except once you lock your money in you won't be able to touch the cash again until the term ends. In return, you get the security of a fixed rate, so you know exactly what interest you’ll have when you eventually can reclaim the funds.
Think of a term deposit like a big bank vault you don’t have a key for - once your money goes in, it doesn’t come out until the term is up.
Features of a term deposit
A term deposit is a long term solution with features that are designed to give you a stable return on your money. These features include:
- Fixed interest rate - When you open a term deposit, you’ll lock in a rate, and that will be the interest you earn for the entire term. That means, your interest won’t be affected if market interest rates drop - so make sure you snag a good rate initially, and you’ll earn a high, steady, return on your money. On the flip side, if you lock in an interest rate and market rates rise, this feature may not seem like such a positive!
- Short or long term - When you set up your term deposit, you’ll be able to choose what length of time you want to lock those funds away for. Terms may be as short as one month, or as long as five years, and generally speaking, the longer the term, the higher the interest rate on offer.
- Rollover terms - Some banks offer rollover term deposits - which means that when one term ends, you have the option to reinvest your savings straight away to grow them even more. Just remember that if you opt for a rollover term, you should check to make sure the interest rate you’re being offered is still the most competitive on the market.
- No fees - One of the great things about term deposits, is you generally won’t be hit by any startup, ongoing, or annual fees to have one. But there are penalties for withdrawing funds early. Usually, this means penalty fees plus reduced interest on your money. So if you’re thinking of a term deposit, the number one rule is to try your best not to make a withdrawal before the term has matured.
Who offers term deposits?
Most financial institutions have term deposits on offer. You could probably head down to the bank where you have a savings account, credit card or home loan and set up a term deposit as well, but you might not get the best deal that way. It’s super important to compare the term deposits on offer from a range of different sources - that way, you’ll be able to find a great interest rate.
Below is a quick snapshot of the different providers offering term deposit accounts in Australia and the pros and cons of each:
Is a term deposit right for me?
Putting your money in a term deposit can be a great savings strategy - but there’s no one size fits all money solution, and a term deposit may or may not be the right fit for you.
When you consider a term deposit, think about:
- Your financial goals - Are they long term or short term? If you’re saving to put down a mortgage deposit a few years from now, or just want to put your money away somewhere safe where it can grow, a term deposit might be a good solution. On the other hand, if you’re saving money so you can go shopping on the weekend, a long-term arrangement like a term deposit is probably not the best option for you.
- Your money habits - How do you want to use your money? If these are funds you often dip into to pay for regular expenses, they really should be in an everyday transaction account, not a term deposit. Plus, if you’re the kind of person who faithfully saves a cut of your paycheck each month, a term deposit may not work out, since you can’t make extra payments into it until the term is up - you may be better off with a killer savings account. A term deposit is best thought of as a place to stash money you don’t want or need to touch for a while.
- The market - Once you lock an interest rate in for your term deposit, you’re stuck with it, so it won’t matter so much what the market does. But it does pay to consider market conditions before you choose a term deposit. If interest rates are falling and don’t look like stopping soon, locking in an interest rate for a fixed time may be a good way to minimise the damage to your savings. On the other hand, if rates are rising, you might kick yourself later for moving too hastily and locking in a lower rate.
How to apply for a term deposit
If you’ve decided a term deposit is right for you, the next move is to apply for one. The first step should be to find the most competitive offer and choose the right bank. Then, you can pop down to your local branch to set up the term deposit, or for most lenders, you can do it online. When you start the process, you’ll need:
- Bank details
- Tax file number
- Identification - usually photo I.D, like a driver’s license is best
- Your personal contact details
The bottom line…
A term deposit is a low maintenance, low risk way to earn a decent return on your savings, and can be a great strategy to maintain savings goals if you’re someone who tends to dip into your stash unnecessarily.
But remember, once your money goes in, you can’t touch it until the term is up - so if you’re likely to need access to your funds in the near future, you might be better off opting for a high interest savings account.