What is a term deposit rollover risk?
Term deposits expire, or mature, at a certain date. At this point, if you haven’t organised moving your money into a new term or a different savings account, your current term will usually roll over.
By letting your term deposit roll over, you risk:
· A less competitive interest rate.
· Earning less interest once your term expires.
· Penalty fees for accessing your money prior to the end of your new term.
Term deposit basics
A term deposit is a savings product that allows you to invest your money for a set term with a fixed interest rate and guaranteed return up to $250,000 by the Government.
Your lender will contact you as your term matures to give you the option of transferring your money to a new investment or withdrawing your money. If you take no action, your investment will likely roll into a new term, usually with less favourable terms. This is known as rollover risk.
When term deposits mature
When a term deposit ends, known as maturing, you have a number of choices about what to do with your money. These include:
· Doing nothing and allowing it to roll into a new same fixed term deposit.
· Placing it in another term deposit with the same financial institution.
· Placing it in a term deposit with a different financial institution.
· Withdrawing the money and using it for something else.
· Withdrawing only a portion of the money and reinvesting the remainder.
Consider the pros and cons
The benefits of letting your term deposit roll over include:
· You won’t have to do anything.
· You’ll continue with the same bank or financial institution.
· You won’t have to fill out any paperwork.
But by taking a passive approach to your savings, you face disadvantages including:
· Potentially receiving a lower interest rate.
· Limited flexibility over the length of the new term.
· Penalties if you try to access your money early.
For this reason, before your term deposit matures, it always pays to contact your financial institution to check whether you can be placed on a higher interest rate than the standard rollover rate.
You should also compare other financial institutions to see what rates they offer on term deposits.
Comparing your term deposit options
If you’re considering a new term deposit, there are a few things to consider before making your decision. Ask yourself the following questions:
· What type of investment do you want to make? The different types of term deposits will impact the returns you see.
· How soon are you likely to need your money? This will dictate whether you choose a short or long-term deposit.
· What interest rate will you receive? Our Term Deposit Calculator can help you determine how much interest you’ll earn throughout the term of the deposit.
· How much money do you have to invest? Some term deposits only offer their best interest rates when you have a certain amount to invest. Consider if your chosen term deposit has a minimum investment.
· When will you receive interest and how is it calculated? Some term deposits calculate interest regularly and pay it on the growing, or compounding, balance in your account. Others pay at maturity and may only pay it on your initial investment.
· What fees are payable? Remember, account management fees will eat into the interest you receive. Also, some term deposits will apply higher penalties than others for accessing your money early.
To avoid the risks associated with letting your investments simply rolling over, start comparing term deposits today so you’re ready to make the switch.