Your complete guide to investing in term deposits

If you’re looking for a safe and predictable way to grow your savings that doesn’t need any experience or much input from you then a term deposit is ideal.

Not all term deposits offer the same interest rates, though, or the same lengths of term, so it’s important for you to head to a comparison site to sift through the market offerings for the best product for your needs.

As you can no doubt imagine, the higher the interest rate, the higher your return at maturity (when the term ends).

The interest rates on term deposits

Term deposits are all about saving money, so in exchange for you leaving the money in the account for the bank to use for its investments, you’ll get a higher interest rate than you might get from an at–call savings account.

The interest rate is locked and fixed for the entire term, so you know exactly how much you’ll be getting at maturity. This also gives you protection against falls in the cash rate which can slow down your savings’ growth.

That fixed interest rate also means you can’t take advantage of rises that might happen, though. If there’s a sudden big rise in the cash rate then you’ll have to miss out or wait until your term deposit matures to move it to a higher rate.

A good way to work out how much you’ll get at maturity is to use a term deposit calculator. This can help you to choose your ideal account.

The pros of term deposits

Guaranteed returns

You have a guaranteed return. Not only is your interest rate fixed, but your money is protected by the government’s deposit guarantee up to the value of $250,000. You can make plans for your money because you know how much you’ll be getting back and when.

You get good interest rates

You’ll always get better interest rates with term deposits than you will with regular saver accounts or transaction accounts.

You have plenty of product options

You can find term deposit products at all the Big Four banks – Westpac, ANZ, Commonwealth Bank and NAB – as well as at smaller banks, building societies and other authorised deposit taking institutions (ADIs). This means you can compare lots of different types of term deposits before selecting your best one.

The cons of term deposits

Missing out on interest rate rises

You may miss out on interest rate rises while your money is locked into your term deposit. This can be frustrating, watching your money crawl along until it’s “free”.

Your money is hard to access

If you want some or all of your money before maturity then you’ll be penalised by forfeiting some or all of your earned interest. You may have to give the bank 31 days’ notice.

You might find higher rates with bonus savings accounts

Occasionally, at–call savings accounts offer special bonus rates that are higher than term deposit rates. However, there’s usually some conditions to meet and maintain. You may need to make a minimum deposit each month, for example, or face restrictions on the number of withdrawals you can make. Your bonus rate might be introductory, which means it’ll revert back to a lower, regular rate after a few months.

How to compare term deposits

First of all, you need to use a reliable comparison site that’ll let you compare the products side–by–side. Once you narrow your search down to a few prospects that you really like the look of, you can read the individual term deposit guides to examine the terms and conditions in greater detail. Here’s what you need to concentrate on.

The interest rate

Your interest rate is vital because it determines how much your return will be at maturity. Your return is the amount of interest you get back along with your principal. Of course, the higher the interest rate, the more your money grows by, but watch out for fees and special conditions, as well as minimum opening balances. All of these things can have a big impact on your eventual return, as well as your ability to open a particular term deposit in the first place. Some deposit sizes and term lengths offer higher rates, but you’ll face steeper minimum balances and longer terms.

How often the interest is calculated and compounded

When the interest on your term deposit is calculated and compounded also has a huge effect on your eventual return. If your interest is calculated daily and them compounded (added back) monthly, it’ll pay out much more that if it was compounded annually. A good term deposit calculator will give you a good idea as to how interest rates and compounding can help (or hinder) your money to grow.

Which account your money will be paid into at maturity

You need to have a designated account to receive your money back, plus interest, at maturity. You may also, with longer terms, choose to have some interest paid out to you either quarterly, half–annually or annually. You may be able to use an existing account as your designated account even if it’s with a different bank to your term deposit provider. Some providers, however, will want your designated account to be with them so you may need to open a new one.

Check for minimum opening deposits

Most term deposits have minimum opening balances of $5,000, with some reaching up to $10,000. There are a few accounts that have minimum opening deposits of $1,000, though, so do look out for them. It’s important, too, when you’re comparing term deposit accounts, to only compare the products that match your needs and available money. There’s no point comparing the finer points of an account with a minimum deposit of $1,000 against one with a minimum deposit of $10,000 if you only have $1,000 to invest.

How long the available terms are

Some providers don’t offer all the possible terms. You may hit on a provider that offers a maximum of three years, for example. If you’re looking for five years, then this bank isn’t for you. On the other hand, some banks offer very low interest rates on shorter terms and it can be worth investing the money for a few months more to get the best results.

The information contained on this web site is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from a financial adviser. If you or someone you know is in financial stress, contact the National Debt Helpline on 1800 007 007.

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