In a competitive market where banks are fighting hard to win depositor’s cash, an excess number of cash accounts aggressively priced to offer decent returns are available, whether it is in the form of a Term Deposit (fixed savings) or Online Savings (variable savings) account. Before you decide where you park your cash, it’s always good to gain a better understanding of the terms and conditions of each type of account before you commit to a particular product.
Term Deposits are fixed-interest accounts offering investor assurance and certainty as you “lock” or “fix” the rate for a set period of time. Investment terms vary from as short as 7 days, up to 5 years, and you will generally get a better rate if you opt in for a longer period. It follows suit that larger deposit amounts also equate to a higher rate of return, in most situations rates for deposits greater than $250,000 can be negotiated.
For short term deposits (less than 1 year), the norm is for interest to be paid at maturity, i.e. at the end of the term investment. For long term deposits (1 year plus), you may have the option of receiving interest monthly, quarterly, half yearly, yearly or at maturity. The interest received is usually paid into a nominated account and not reinvested with the initial term deposit. Also, interest is typically not compounded for term deposits. Some things to consider include:
Choice of Term – this will ultimately be a tough decision to make, nominating an optimum term to lock your money away. You really have to assess a timeframe in which you can go without accessing these funds, while putting aside enough cash in the event of an emergency.
Early Withdrawal Penalty – a penalty may apply if you need to withdrawal your funds before the maturity date. This interest adjustment will typically take the form of a rate reduction, a withdrawal fee, or forfeiting a month’s interest payment.
Interest Calculation / Payment –the interest paid on term deposits is typically non-compounding, so you will receive a similar interest amount based on your interest payment period, which can be handy as regular income stream. Basically you won’t be earning interest, on your interest.
Reinvestment Option – as your term deposit is about to mature, you should be informed by your institution what will happen to your investment. If you don’t respond, your money will be automatically reinvested for an additional term with the current market yields. Keep on top of when your term deposit will mature, as this is something that can easily be overlooked at the time.
Online Savings accounts are typically considered the new breed of savings accounts, with funds access over the internet or via a phone facility. Given there is no branch access, institutions have less overheads and can therefore offer a higher rate yield. The convenience of being able to view your account 24/7 is a good way to monitor your spending also.
Transferring funds to an online saver is typically done through a transaction account, or in some instances you can have your salary credited directly into this account. You can access your cash through a linked account, however in some instances you will have to link to a transaction account from the same institution. If you link accounts from different institutions, be aware that there might be delays in the transfer of funds, sometimes up to 48 hours. Interest is typically calculated daily and credit monthly for an online savings account. Some things to consider include:
Minimum Balance Requirement – there are some accounts that pay tiered interest rates, so be aware that your balance does not fall below the respective thresholds. In some extreme cases there are also accounts that require you to hold a certain amount of cash in the account, however that portion is non-interest bearing.
Introductory / Promotional Rates – you need to understand what will happen if interest rates decide to move – how will the introductory/promotional rate be affected. Will the bonus interest margin move in line with changes to the base rate, or will the advertised rate be available for the full period of the offer?
Introductory / Promotional Period – for what period is this offer in place? People often overlook what the product will revert to at the end of the period when this should be an important point to consider. In some instances the offer period can by far outweigh the benefit of switching.
Conditional Account Terms – do you need to make a regular deposit of a specified amount each month to qualify for a higher rate? On top, are you restricted in making withdrawals from this account? These may sometimes play against you as you lose the flexibility of accessing funds.
While both types of accounts have their strengths and weaknesses, the best way to maximise the rate of return is to consider your individual circumstances and outline what you expect to achieve. Most importantly be aware of all the terms and conditions attached with opening up an account, especially for online savings accounts with promotional/introductory/conditional offers. Knowing what to look out for can definitely be of benefit, especially in a highly competitive deposit market where institutions look to bolster their cash holdings/deposit base.
Be proactive and shop around – chase rates to ensure you are getting the maximum rate of return. Visit Infochoice.com.au for a comprehensive listing of Term Deposits and Online Savings accounts.
Source: Infochoice.com.au
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