Putting a lump sum into a term deposit means you’ll have to go without it until the term's conclusion if you want to receive the full interest payment. However, there’s normally a bit more flexibility around the interest payments themselves.

Most banks allow you to choose whether you want to be paid in a single lump sum once the term is finished, or at regular intervals throughout. The most common interest payment intervals include at maturity/at the end of term, annually, bi or semi annually, quarterly, and monthly.

## How do interest payments on term deposits work?

The interest rate on a term deposit is the amount you would earn on your deposit in a year, because interest is expressed on a p.a. or per annum basis - per year. Interest is calculated daily by taking the deposit amount, multiplying it by the annual interest rate then dividing that by 365.

• At maturity/at end of term: Interest is paid in one lump sum at the term’s conclusion

• Annually: Interest is paid once per year. If you had a 5-year term, it would be paid five times.

• Semi/bi-annually: Interest is paid every six months or twice a year.

• Quarterly: Interest is paid every three months or four times a year.

• Monthly: Interest is paid once a month, or 12 times a year.

A less common interval is fortnightly payments, while some banks even allow upfront interest payments. Most term deposit providers don’t allow interest to compound though, so you don’t earn interest on what you’ve already earned.

Usually you have to nominate a bank account or link a transaction account to where the interest is paid for more regular interest payments. For end of term payments, the bank might funnel it into the term deposit and offer you to lock it away again.

Say you have a \$10,000 deposit. If you put it into a one year term deposit paying 5.00% p.a. (interest paid end of term), at the end of the year you would receive a \$500 interest payment along with your \$10,000 back.

Now let's say you put that \$10,000 into a different term deposit, also returning 5.00% p.a with end of term interest payments, only this time it’s a six month term. Your interest payment would now just be \$250, since you were only earning for half the year. You could also work this out by taking \$10,000*0.05/365 to get the daily interest payments, then multiplying this by about 182 to get how much you’ve accumulated after six months.

On the other hand, let's say you manage to find a two year term deposit returning 5.00% p.a. You would then receive \$1,000 at the end of the term (\$500 for each year).

## Rate reductions for monthly, quarterly or semi annual payments

So interest is calculated daily, but the payment frequency can vary. Take AMP, which currently offers monthly, quarterly, semi annual, annual or end of term interest payments. Annual payments and at-maturity payments are the same rate, while there are 5,10 and 20 basis point discounts for semi annual, quarterly and monthly payments respectively.

Take a look at AMP’s one year term deposit, with a current upper rate of 5.05% p.a* for deposits above \$25,000.

*Correct as of 15th August 2023

Payment frequency

Interest rate

Regular payment (on a \$25,000 deposit

Total interest earned

End of term

5.05% p.a

\$1,262.50 after one year

\$1,262.50

Semi annually

5.00% p.a

\$625 every six months

\$1,250

Quarterly

4.95% p.a

\$309.38 every three months

\$1,237.50

Monthly

4.85% p.a

\$101.04 each month

\$1,212.50

## Is it better to get interest paid monthly or annually?

Many term deposit providers have lower returns on products with a higher payment frequency, so the more regularly you get paid, the lower your eventual gains are. The flip side of this though is you start to receive returns quickly as opposed to waiting the entire term length to get a cent.

You might value short term cash flow enough that you feel it’s worth a slightly smaller total interest pay out for regular payments from your investment. It also depends on your outlook on opportunity cost and inflation - if you think the money is better in your hands sooner, then you could opt for a more regular payment.

Alternatively, if cash flow isn’t a problem and you can afford to wait, it probably makes sense to choose the highest interest rate possible. Neither strategy is better than the other and will just depend on your investment priorities.

## What happens if you break a term deposit early?

Most term deposit products penalise you for withdrawing your deposit before the term length has elapsed by reducing your interest payment by a certain amount. If you’re exiting early, many banks also require 31 days' notice as well

These penalties vary between providers, so you’ll want to check the terms of conditions of the bank you are choosing. To give you an idea, these are the penalty rates currently enforced at CommBank, Westpac and ANZ.

How far into the term the withdrawal is

Interest rate reduction

<20%

90%

20% to <40%

80%

40% to <60%

60%

60% to <80%

40%

80% to <100%

20%

To illustrate how this works, imagine you deposit \$10,000 into a one year term at 4% p.a with interest paid at the end, but after six months (182 days) decide to withdraw your money. Since 50% of the term has elapsed, your interest rate reduction will be 60%, so 60% x 4.00% p.a = 2.40%.

Your overall earnings would be roughly \$200, but your interest rate reduction is about \$120 (\$10,000*0.024/365). This means your payout would only be \$10,080 (the \$10,000 deposit plus the total \$80 interest earned).

According to CommBank’s terms and conditions, the bank will take interest payments already made into account when calculating the prepayment adjustment, and deduct accordingly from the sum you are paid out.

Let’s say the TD in the example above had monthly interest payments instead of end of term. If the first day of the deposit was January 1st, these are the repayments you would have received over the first five months.

Month

Interest payment

January

(\$10,000*0.04/365)*31=\$33.97

February

(\$10,000*0.04/365)*28=\$30.68

March

(\$10,000*0.04/365)*31=\$33.97

April

(\$10,000*0.04/365)*30=\$32.88

May

(\$10,000*0.04/365)*31=\$33.97

Total

\$165.47

Let's say once again, your withdrawal date is June 30th, which would mean 181 days of the term had elapsed. During June, you would have accumulated a further \$32.88, so the total interest comes to \$198.35.

Once again though, the 60% reduction would be applied. The interest rate reduction would be (\$10,000*0.024/365)*181=\$119.01. Subtracting this means the total interest you will be paid out is \$79.34.

However, since you were already paid out \$165.47, the difference is subtracted from the deposit you are paid out. When you withdraw, the bank will give you \$9,913.87 (\$10,079.34-\$165.47), minus any account fees.

Other banks might have further dishonour charges for breaking a term deposit, which usually are around \$30 or so.

## Term deposit rates in Australia

Like interest rates on home and personal loans, term deposit rates tend to fluctuate with the RBA cash rate. When the cash rate is high, term deposit returns are normally high as well.

They also act as a bit of a crystal ball into what the bank is thinking - if they are cutting rates it could mean they will forecast lower rates by the end of your term deposit. After all, a term deposit locks your funds away and the bank is always going to try and win the gamble!