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What is a term deposit?
Term deposits are bank accounts that run for a fixed term and offer a fixed interest rate. The term could be as little as one month or as much as five years, and money in the account is locked away and unavailable during this period.
Depending on the amount you wish to invest, the interest rate can be up to 6.9% higher than everyday bank accounts. The rate generally improves with a greater amount of money invested. For example, a sum of between $5,000 and $25,000 held in a term deposit account for three, seven or twelve months will generally offer a return of between 5.2% and 6.5%, whereas a sum in the region of $250,000 held in a 12-month account may return at a rate closer to 7% per annum. A minimum deposit of $5,000 is usually required by all banks. Some institutions may offer a lower minimum deposit, but generally this will reduce the interest rate to between 1% and 2%.
Term deposits are secure, low-risk and convenient for calculating exactly what your return will be at the end of the investment period, as rates are fixed for the life of the deposit. However, returns won’t be as high as with riskier investments, such as shares or mutual funds.
Most banks and credit unions offer term deposits, and they’re very easy to set up.
Tips for choosing a term deposit account
- Shop around – you don’t need to choose a term deposit from your everyday bank if they don’t offer you the best rate. However, some banks may offer you a better deal if you also bank with them
- Be aware of when interest payments are calculated and made – some institutions calculate interest daily, some monthly, and interest payments may be made monthly or at the end of the term. For the best return on your investment you should go for a term deposit that pays interest regularly and allows you to roll that interest back into the term deposit. Or, if you need a little extra money now, you could choose to have the interest paid into your regular transaction account
- Choose your term carefully – make sure you won’t need the cash during the term of your agreement; there are often considerable fees associated with ending your term deposit early
- Consider other savings options – don’t just look at term deposits. If you have extra cash to invest consider online savings accounts and cash management accounts (CMAs) as well. These offer higher interest rates than everyday banking accounts and still give you flexible access to your money
- Don’t lock away all of your savings in a term deposit – make sure you have some savings “at call” for emergencies
Term deposits (sometimes known as “time deposits”) are an attractive savings option in terms of return, especially with larger investments. If you are looking for a secure, low-risk alternative to share investments and a high-yielding solution for money sat idle in your bank account, a term deposit could be the perfect fix.