The best term deposits for July 2020

A term deposit is a savings account that you hold funds in for a pre–determined period of time, usually between 31 days and five years. During this period, the money is locked away and you can’t access it without penalties.

In exchange for agreeing with your provider to invest your money with them for a definite period of time, the bank or other provider offers you a fixed rate of interest for the duration. This interest rate is often higher than the rates offered by at–call saver accounts, too. Once the set period has ended, which is also known as “maturing”, you can choose whether to reinvest some or all of the money back into another term deposit or you can withdraw all of the funds.

The good things about term deposits

A term deposit is seen as a safe, low–risk investment vehicle simply because of its fixed interest rate. You’ll know how much money you’ll be getting at maturity and you’ll also be protected from any cuts in interest rate. This stability is especially important in the longer terms, which can be up to five years. If you have some money that you won’t be needing any time soon, then putting it into a term deposit can work really well. The fact that you’ll face a penalty for an early withdrawal also helps you to resist any temptation you might feel to dip into your savings ahead of maturity.

The differences between term deposits and at–call savers

The biggest difference between a term deposit and an at–call saver is the ease with which you can get to your money. A regular saver lets you withdraw the money pretty much at will and there’s usually no fees or costs involved with depositing or withdrawing.

Term deposits, on the other hand, will penalise you for withdrawing early, usually by reducing your interest rate or charging you an amount of money equivalent to a portion of the interest already earned. If you think you might need to get to your money, then a saver might be better than a term deposit.

The other big difference is that a regular saver will probably have a variable interest rate, while term deposits have fixed rates. The variable rate might go up, which is good news, or it might be cut, which isn’t so good. A fixed rate offers predictability, although you’re just as insulated from rate rises as you are from cuts.

Comparing term deposits

There’s no such thing as the “best” term deposit in an objective sense. You’re looking for the best product for you and your needs and aims. There are several factors you need to look at before choosing your ideal term deposit:

  • The interest rate
  • The term length and interest rate combination that works best for you
  • The minimum deposit amount – some are as low as $1,000 while others are as much as $50,000
  • How often interest is calculated and whether it’s compounded
  • What, if any, ongoing fees you might pay
  • What penalties you’ll face for breaking the term early
  • Whether you can withdraw some of your money without incurring penalties
  • How easy it is to check your balance, and
  • What happens to your money at maturity; does it roll over into another term automatically or does it go into your nominated account?

The duration of term deposits is a major factor

The length of the term is important because not only does this make or break your savings plans, but the interest rate almost always varies with the term. In general, the longer the term, the higher the rate.

Three–month term deposits

Ideal for a shorter savings campaign, such as for a holiday, a three–month term deposit can work well, particularly on larger deposits. The Citi Bank three–month term deposit offers savers an interest rate of 0.90 per cent p.a. on balances between $10,000 and $250,000. There’s also the Judo Bank product, which offers an interest rate of 1.36 per cent p.a. on balances between $1,000 and $1,000,000.

Six–month term deposits

If you have slightly longer–term saving aims, then a six–month term deposit might offer a higher interest rate than the three–month one. The Judo Bank 180–day term deposit has an interest rate of 1.41 per cent p.a. on balances from $1,000 to $1,000,000.  

Two–year term deposits

Savings goals such as university fees or a home loan deposit need longer–term savings products like a two–year term deposit.

Judo Bank offers savers an interest rate of 1.45 per cent p.a. on balances between $1,000 and $1,000,000. This is one of the best term deposit rates on the market at the moment and you’ll get a loyalty bonus of a further 0.10 per cent p.a. if you roll your money over for another term.

Five–year term deposits

If you’re looking to grow your money over a longer period, then there are plenty of five–year term deposits available. There’s the ME Bank business term deposit, which offers 1.10 per cent p.a. on balances between $5,000 and $1,000,000. For personal term deposits, there’s the Rabobank online term deposit, which offers 1.10 per cent p.a. on balances between $1,000 and $2,000,000.

Paying tax on term deposits

If you have money invested in a term deposit, you’ll probably have to pay tax on the interest you earn, as this is classed as income. The amount you pay will depend on your overall taxable income, as well as when you receive your interest payments.

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