What happens to your term deposit if your bank closes?

Term deposits are covered under the government’s Financial Claims Scheme (FCS), but what about the interest you’ve been patiently trying to accrue?

Say you’re on month 5 of a 6 month term deposit, but the bank announces it will close before your term reaches maturity. Will you get a percentage of your interest paid out when the bank shuts off the lights? Or are you left out in the cold, without a dime for your time?

Well, the answer is… it depends. 

The way banks treat term deposit breaks – for any reason, including if your bank closes its doors – can usually be found in their terms and conditions. 

A recent, real-world example of this sort of situation coming to pass is with the recently closed Volt Bank. 

Chief executive of Volt Bank, Steve Weston told Mozo, “In our case we paid accrued interest up until the date we broke the term deposit.

“As market rates had increased, customers benefited from us breaking as they could reinvest at the higher deposit rates on offer.”

For starters, it’s pretty unlikely that an established Australian bank would fail or go bankrupt. Plus, if they did, you'd still be protected by the FCS up to $250,000 per person, per ADI (bank, credit union or building society).  

But as we’ve seen in recent years, it’s the smaller ADIs, like neobanks Volt and Xinja, that appear more likely to shut down.

That’s not to say that depositing your money with the smaller guys is too fraught with risk to be worthwhile. No, in fact the average term deposit rate in the Mozo database for the Big Four banks is 1.71% p.a. Compare that with the average term deposit rate across all offerings in our database – 2.36% p.a. –  and rates are significantly higher as you step outside the bounds of the major players.

Typically, a higher interest rate for savings products comes from a bank or ADI having less overhead – that is, physical branches populated with staff, as opposed to online-only support. Naturally, there are pros and cons for either of these, so be sure to look at term deposit reviews from our customers to get the bigger picture.

In the meantime, have a look at the sorts of term deposits that are available right here, right now.