- The types of term deposits in Australia can be classified by length into short-term (1-9 months), medium-term (9-18 months), and long-term (2-5 years).
- Interest payment frequency in term deposits varies, with less frequent payments usually offering higher rates, while more frequent payments might reduce the rate slightly.
- Banks typically have minimum and maximum deposit requirements, often ranging from $5,000 to $1 million, though this differs based on the bank.
A term deposit is a financial investment where you put an initial deposit away for a set period of time. As the term matures, it accrues interest at a previously agreed rate. Where all term deposits are the same is that they are simple interest, not compound interest like with savings accounts.
Another way they are the same is that all genuine term deposits offered by banks in Australia are covered under the government’s $250,000 guarantee. You’ll also need to consider that interest is classed as taxable income.
So, let’s look at the types of term deposits out there. Many are highly customisable, with the two most common ways to compare being the interest rate, and term length- whether that’s one month or five years.
Other ways term deposits differ is their deposit sizes, and other options such as what it does when it matures.
Compare Term Deposit Interest Rates
Term deposit interest rates are largely determined by a bank’s wholesale funding rate, and if they want to source funding for other operations through their deposits. Wholesale funding rates can be dependent on RBA cash rate expectations.
In this sense it’s hard to say if any term length definitively yields a higher interest rate. Generally, however, banks in Australia have a shorter-term view compared to other banks overseas. This means that, after about one year, the longer the term the less likely it is to have a strong interest rate.
Term Deposit Types - Term Lengths
Term deposits in Australia can last anywhere from one month to five years. They are generally split into three types: short-term, medium-term, and long-term.
Remember
All interest rates are expressed as p.a. - ‘per annum’ or per year.
Short Term
Short-term generally refers to anywhere from one to nine, or even up to 12 months. While your funds are still locked away, they offer a decent blend of fixed interest and a palatable tenure.
Medium Term
Medium-term generally refers to anywhere from nine months to about 18 months. This has been about the sweet spot in terms of a high interest rate and less intimidating term length.
For example, most people might know what their financial goals will be for about 12 months, but might not be able to plan, say, five years in the future.
Long Term
Long-term generally refers to anything from two to five years. The maximum term available in the Australian deposit market is five years.
If you have a chunk of cash you don’t mind stashing away, or ‘setting and forgetting’, and/or you think that interest rates will go down over those years, a longer term could be a good bet.
However, depending on what wholesale funding markets are doing, long terms generally don’t offer as-attractive rates as medium-term products.
Choose Interest Payment Frequency
Many term deposits will only pay out your interest once the term matures, with the most competitive rates going to these. After all, the bank wants to hold on to your money as long as it can, and reward you as infrequently as it can.
But there are some types of term deposits that pay interest annually, bi-annually (twice a year), quarterly, monthly, or even fortnightly.
The catch is that if you opt for a more frequent payment, you’ll usually face a lower interest rate. This might only be minor, say 5-10 basis points, and some banks might even offer the same rates across all payment frequencies.
Think About...
The bonus of more frequent interest is that you can eliminate ‘opportunity cost’. With more frequent payments coming in, you can take the payout and invest elsewhere such as a savings account or even the share market.
Or, if your balance is high enough, you can live off the interest. Say you had $1 million invested at 5.00% p.a. with a monthly payment, that equates to about $4,166 a month before taxes - not too shabby.
Consider Minimum & Maximum Deposits
Banks typically have the same minimum and maximum deposits whether you’re investing for one month or five years.
-
A common minimum is $5,000 while a common maximum is $1 million. However, this can differ.
-
Anywhere from a minimum of $500 to a maximum of $10 million is seen in the market.
-
Some banks do not explicitly state their maximum, however you might need to call their customer service team if you want to deposit, say, more than $1 million.
Many banks also offer stepped interest rates depending on the size of your deposit. For example, if you have less than $25,000, your rate might be slightly lower than if you had over this amount. At the other end of the spectrum this is also true; the rate might be competitive up to $1 million but could drop off after this.
A quick note on the $250,000 ADI guarantee
Keep in mind the government’s $250,000 guarantee. If this is a concern for you and you have more than 250 big ones ready to invest, it could be wise to spread your savings across different banks.
This includes any other deposits you hold with that bank. However it covers each account holder, meaning if you had an account with your spouse you would be covered up to a collective $500,000.
Keep in mind some banks share ADIs such as Westpac, Bank of Melbourne, BankSA, and St George; NAB and ubank.
Look at Other Features
While not as crucial as the above key features, these can still determine the type of term deposit you go for.
Notice Periods
Banks' regulatory requirements mean that you need to give them notice if you want to withdraw from a term deposit. The typical notice period is 31 days.
Some banks offer no-notice term deposits, usually at the expense of a much lower interest rate. In any case, if you break a term deposit early, you’ll likely sacrifice a lot of interest, as seen below.
Rollover Options
Hmm, what to do when the term deposit matures? That’s the big question. In the lead up to your maturation date, your bank should notify you of your options.
Common options include full rollover into a new term deposit; a partial rollover; or a full payout. Any rollover will likely feature the prevailing rate of the day, so it could be much lower than what you’ve locked in.
As this big date arrives, this leads us to the next point; where you get your principal & interest paid into.
Rollover & Interest Payout Options
You will need to tell the bank where you want your principal investment and interest paid into on maturity. This also applies if you opt for more frequent interest payments.
Many banks may not allow you the choice in nominating a bank account, and will open up a companion transaction account alongside your term deposit. This allows funds and interest to be automatically paid into there.
Some other banks might be more lenient; on opening the term deposit you might have the option to nominate an external bank account to have the principal and interest paid. This can be handy if you primarily bank or save with another institution.
Early Withdrawal Penalties
A term deposit is generally not recommended unless you can take on the full term. However, certain instances make sense to withdraw early, such as if interest rates are rising rapidly and you want to take advantage.
A typical early withdrawal interest sacrifice schedule looks like this:
|
Percentage of the term lapsed |
Interest rate reduction |
|---|---|
|
0% to 20% |
90% |
|
20% to 40% |
80% |
|
40% to 60% |
60% |
|
60% to 80% |
40% |
|
80% to 100% |
20% |
As an example, if you locked in a 12-month term deposit as 5.00% p.a. with $50,000, ordinarily you’d earn $2,500 per year. However, if you requested to withdraw six months in, the interest payout would be more like $1,500.
This is just an example, and banks might be more harsh, or even charge a nominal fee - typically about $30. In this case, if this outweighs your interest payable, this could come out of your principal investment.
In the event of financial hardship or the account holder’s death, these penalties are usually waived.
Article first published by Jonathan Jackson in April 2019.
Image by Umesh Soni on Unsplash.
