Term Deposits Explained
A term deposit is a financial product which has been used by Australian savers for many decades.
Term deposits are popular with Australians due to the stability they offer in providing a fixed rate of return over a fixed period of time. Terms deposits are available to individuals and organisations, as well as self managed super funds.
How a term deposit works
All term deposits have a fixed rate of interest with a fixed timeframe. For example a product may offer a fixed rate of 6% per annum over a fixed period of five years. The end of the fixed term is known as the maturity date and this is when the funds can be released from the deposit.
The way that interest is paid on term deposits can vary slightly between banks, however generally interest will be paid upon maturity for term deposits of twelve months or less, and annually for term deposits with a term or more than twelve months.
You can generally withdraw your money prior to the maturity date, however there will often be penalties for doing so. Commonly by withdrawing early you will forfeit any interest that has been earned on the deposit.
Benefits of term deposits
Traditionally the major benefit of a term deposit has been the high rate of interest paid, however this advantage has been somewhat diminished by the arrival of high interest savings account which offer easier access to your money.
The advantage that the term deposit retains is that the rate of interest is fixed for a certain period of time. The rate on a high interest savings account can change at any time, however a term deposit gives you the security of a fixed rate for up to five years or potentially longer.
What to look for
The interest rate is generally going to be the number one factor to consider, however you also need to consider the length of the term and whether or not you may need to access the funds during that time.
If there is a chance that you may require the funds within the term deposit period, you may be better off selecting a shorter term or even considering a different product that allows easier access to your money.
Any benefit from your term deposit will generally be lost if you withdraw the money before the term ends.
Term deposit interest rates
As with most financial products, the interest rates on term deposits do vary from one institution to the next.
As a general rule you will receive a higher interest rate for locking into a longer term, however there can be exceptions at various times due to economic conditions or even promotional rates offered from time to time.
Many institutions will offer higher rates for larger amounts of money being deposited, and for particularly large sums the banks will often be willing to negotiate a special term deposit rate with you.
The main alternative to a term deposit is a high interest savings account. Often the rates offered by high interest accounts can be close to that of term deposits, which can seem attractive given that you can access you money much more easily from these types of accounts.
Although high interest accounts have their advantages, they cannot offer the stability of a term deposit. If interest rates in the market start to drop, the return from your high interest account will likely drop as well, however a term deposit will continue to earn the original rate no matter what happens to the economy.