What is term deposit ‘rollover risk?’

At first sight, term deposits are pretty much the ideal, low–maintenance savings vehicles; you deposit your money, then sit back and wait for the term to end so you can collect your interest earnings. You’ll know exactly how much your money will grow by because both the interest rate and the investment term are fixed.

At the end of the term, you can ‘rollover’ your term deposit to a new term deposit and this might seem like an effort–free way to keep growing your savings, but if you’re to get the best out of your financial products then you must be aware of the risks involved with rollovers and be ready to take action to avoid them.

Be ready to move

At the end of the term (maturity), surely you can just collect your deposit (with interest) and go home, right? Well, not always. While your interest might be deposited into a linked bank account, you might not necessarily get the principal (the amount you invested) back straight away.

You probably got a letter or message from your bank about the term coming to an end and asking what you want to do with your money. If you don’t reply, it might be reinvested into another term deposit, even if this isn’t what you want. This is often a default feature known as automatic rollover.

What is a term deposit rollover?

If your term deposit has an automatic rollover feature then your bank will simply move the principal into another term deposit for the same length of time if you don’t ask them to do otherwise.

Usually, your bank will remind you that your term is coming to a close so that you can decide what to do with it. If you don’t advise them, your investment will start over again, but it might be at a lower interest rate. You may also have had other plans for the principal amount, but suddenly you find it’s locked away in a deposit. This is the risk.

Of course, the interest rate may be higher, which is good but if you don’t pay attention to your calendar then you can’t control what happens to your money. But the interest rate also could be significantly lower after your term deposit has been rolled over, which is the main feature of rollover risk. If you treat your term deposit as a “set and forget” product, then you might not get as much out of your investments as you could.

ASIC reviewed automatic term deposit rollovers

Back in 2013, ASIC reported on its concerns over rollovers and the “dual pricing” method that providers use. This method involves the intense marketing of the higher rates and the not–so–heavy marketing of the – you guessed it – lower rates that can be applied to deposits after they’ve matured.

ASIC also said that customers improved their yields as a result of their ADI telling customers about their lower interest rates before the term matured.  ADIs also helped by setting their higher rates onto more products, reducing the risk of a rollover into a lower–performing product.

Investors also helped themselves by watching out for their deposits maturing and by using any grace periods available if their deposits do “escape” and rollover.

About the grace periods

If you just miss your term deposit’s rollover date and you wanted to move your money to another vehicle, then you should have a grace period in which to overturn your bank’s decision. These periods are usually a week, so you will have to act fast. If you miss this grace period, then you’ll either have to leave the money where it is or pay the early withdrawal penalties.

Early withdrawal penalties

Your institution won’t want you to withdraw your money before the end of the term because it needs it to fund its own investments. To dissuade you from early withdrawals, your bank will levy fees and penalties; you can get to your money, but you’ll pay in some way. Common penalties include:

  • Withdrawal notice periods of up to 31 days from your request
  • early exit fees that may be determined by the amount you’re withdrawing or a flat fee
  • a reduction on the interest rate for any money remaining in the deposit; these reductions are based on the length of time left on the term.

It might be worth paying the fees if you’re moving the money to a great interest rate, or you may just have to wait it out. Do the maths using a term deposit calculator before you make any moves. Of course, if you just want your principal amount out, then a reduced interest rate won’t matter.

Other options for your money when your term deposit matures

You might be quite happy to let your money just rollover into another term deposit, especially if you have a variety of savings vehicles. Letting your bank take care of things (while giving you a nice little interest payment, of course) means you can kick back and relax while your money grows. Even if it’s not at the previous interest rate, at least it’s growing, right?

You can also close the term deposit entirely, reinvest the money in a different term deposit or move it to a different sort of account altogether.

If you decide to close the term deposit then you simply ask for the money to be transferred to a designated account – you probably supplied these details when you opened the deposit in the first place. On the other hand, if you’re planning to reinvest the money, then you should ask the bank if it can offer you a better rate than other providers or another sort of sweetener, for your repeat business. The worst they can say is no, and if you can back up your request by pointing out all the great term deposits you found on your favourite comparison site, you’ll be presenting a very persuasive argument.

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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