What is a term deposit? What is a fixed deposit?

You have probably heard of “term deposits” and you may have heard of “fixed term deposits” but do you know what these financial products are?

Firstly, they are the same thing.

In some parts of the world, a term deposit that lasts longer than six months may be called a fixed deposit, but it’s still a term deposit.

Term deposits are popular investment accounts as they rarely need monitoring once they’re set up. You simply sit back and wait for the account to mature.

One reason that “term deposit” is interchangeable with “fixed deposit” is because the name is referring to two different aspects of the account. You open the account for a set term, usually from one month to five years and the interest rate is fixed at that point. This means it doesn’t fluctuate alongside the cash rate, like an at-call savings account.

How does a term deposit work?

When you open a term deposit, you’re investing cash and the money will be held by the financial institution for a predefined term. You can open term deposits at a bank, building society or credit union, as long as the institution is an Authorised Deposit-taking Institution or ADI.

Once the money is invested, it has to stay there for the entire term you’ve chosen. If you leave the money for the entire term, the interest rate is guaranteed to stay constant until maturity.

To collect the interest you’ve earned, you can opt for it to be paid to you monthly, quarterly, half yearly or on maturity of the term. Some term deposits have different interest rates according to the way you want to be paid your interest. Usually you can get a slightly higher rate if you wait for your interest to be paid to upon maturity (the end) of the term.

If you need to make a partial or full withdrawal before the term ends, you’ll be penalised, usually by forfeiting some or all of the interest.

Who and what is a term deposit good for?

These investment accounts are great for investors who value the fixed term deposit rates, security and guaranteed returns more than the size of the return. As the interest rate on a term deposit is fixed, it won’t fall if the base rate does; however, it won’t rise either.

More experienced investors use long term deposit accounts in a mixed portfolio that often includes higher–risk but higher–return vehicles. Conservative investors and people with definite savings targets also use term deposits because not only are they government-backed but they make financial planning easier as you know what you’re getting.

At the moment in Australia term deposit rates, because they’re fixed for the duration, offer more stability in the face of falling interest rates.

Where can you open a term deposit?

Most of Australia’s banks, building societies and credit unions offer term deposits, so spend some time on a comparison site before making a decision. Each offering is different, though, even within the same institution.

What is the minimum balance allowed for a term deposit?

Most term deposits have a minimum opening balance of $5,000, with some requiring at least $50,000. There are some options for you if you have less than $5,000, though, as some banks offer term deposits with minimum opening balances of $1,000 or even as low as $500.

Is it easy to apply to open a term deposit?

Yes, it’s pretty much the same as applying for any other sort of bank account. In some ways it’s easier as term deposits don’t offer any overdrafts or ask you to make further payments, so as long as you have the funds available, you should find things very straightforward.

It helps if you’re already banking with the term deposit provider, but once you’ve chosen a particular provider and account, you simply fill out a form and arrange for the funds transfer. In most cases, you can open a term deposit online, so you don’t even have to head to your nearest branch.

If you choose a term deposit with a different bank or credit union, you will need to produce 100 points of identification because you are opening a new bank account.

What sort of interest rates do term deposits offer to investors?

Interest rates in Australia are at historic lows, so you won’t be seeing 2008’s heights of seven per cent for a while. However, if you take your time and shop around you should be able to find something attractive.

Commonwealth Bank is offering 2.05 per cent for a six–month term.

UBank has a “Green Term Deposit” currently paying 2.45 per cent p.a. for one year.

Queenslanders Credit Union is paying 2.70 per cent p.a. for one year.

Generally speaking, the more money you invest and the longer the term, the better the rates tend to be. When you’re looking at term deposit rates compare how the length makes a difference to your return.

Although your money will grow at the same rate once it’s deposited, the cash rate can change at any time, so any new term deposits you open will be influenced by the new levels. However, the fixed interest rate is one of the advantages of a term deposit vs savings account.

What else do I need to think about?

While the interest rate is the most important factor to look at when you’re making your decision, there are other things to consider too.

1) The term

The tenure, or term, is the length of your investment, the length of time your money stays in the account. Tenures range from one month (you may see this expressed as 30 days) to five years (or 60 months). Everyone’s needs are different, so you have to decide the best tenure for you. Generally, you’ll get a higher interest rate the longer the tenure, but then, you have to wait longer.

2) Are you likely to need fast access to the money?

If you think that you might need to get to your money in a hurry then you should think carefully before choosing a longer term. If you’re saving up for a home deposit, for example, and your ideal property suddenly appears on the market at a great price, you may have to withdraw the funds. You will face penalties, like loss of interest, for early withdrawal

3) Your money’s security

Australia has a Financial Claims Scheme which guarantees your bank and credit union deposits up to $250,000 per institution.

If you have more than $250,000 to invest, you may like to spread your money across two or more institutions to ensure the whole amount is covered by the government guarantee.

4) One last tip—read the small print

Term deposits come with a Product Disclosure Statement (AKA the small print) because they are a financial investment product. The PDS tells you what your rights and obligations are with the bank and your term deposit. Check the PDS over even if you’re opening your tenth term deposit with your bank as there may have been changes in conditions.

Take note of maturity conditions, the fee structure (if there is one) and what the penalties for early withdrawal of funds are. Your total return on investment will be affected if you pay any fees or penalties, so keep a sharp eye out for them.

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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