- Your bank should inform you via email or post that your term deposit is coming to maturity.
- If you don't action anything, it will likely automatically rollover into an equivalent term deposit, which could carry a much lower interest rate.
- You can also opt to withdraw your funds and invest elswhere, or invest in another term deposit with different rates or tenures.
- Interest and principal is likely paid into a linked transaction account.
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. However, 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.
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 might have received an email or letter from your bank about the term coming to an end, 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.
This can be a cheeky way for banks to rely on inert customers to fleece them by locking their funds away on a much lower interest rate for another period. You will probably need to act to get the best rate.
What is a term deposit rollover?
Rollover describes what happens at the end of your term deposit period, which can be anywhere from one month to five years. If you roll the funds over, they will be re-invested into the same bank's equivalent term deposit at the time.
If you do not act when you receive the notice your maturity is coming up, 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. This could be up to five years!
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.
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. Many banks require 31 days' notice to withdraw your funds, which is a regulatory requirement.
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. The most common way is a heavy reduction in interest, and even an administrative fee. A typical reduced interest schedule looks something like this:
|
Percentage of 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% |
Some banks might be harsher, and some might even charge a nominal fee of around $30. If this outweighs the interest owed, it could come out of your principal. Generally any of these penalties are waived if the account holder has died, or is in financial hardship.
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. Generally speaking, however, it's not advisable to open a term deposit in the first place if you think you'll need that money in the term.
That's why it's important to act when it comes time to rollover; you might have been saving that money for a house deposit, for example, so you'll want access to that cash.
What to do at Term Deposit Maturity
You've got the notice from your bank that your term deposit is maturing - just like the chance card in Monopoly. This is your chance to instruct the bank what to do with that money - and each option can present an exciting opportunity to review your savings goals.
Automatic Rollover
You might be quite happy to let your money just rollover into another term deposit with the same institution, 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?
Just be aware the interest rate could be significantly lower than what you locked in previously.
Withdraw Funds
If you decide to close the term deposit then you simply ask for the money plus interest to be transferred to a designated account - you probably supplied these details when you opened the deposit in the first place.
In many cases this is a linked transaction account with the same bank, or sometimes you might have been able to nominate an external bank account. If you have opted for frequent interest payments - such as monthly or quarterly - chances are your interest payments were made into there. After maturity, your principal might take a little longer to make its way back into that account than the interest due to banks' regulatory red tape.
Re-Invest Elsewhere
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.
If this isn't fruitful, then you can opt to withdraw the funds, then re-invest them at your leisure into a savings account, or even something like shares or exchange-traded funds (ETFs). Keep in mind the share market is a different beast, and is more risky.
Choose Another Term Deposit
You might have a hankering for another TD, but not with the bank you've been using for the past tenure. In this case, you can opt to withdraw the funds into the linked transaction account, then use those funds - plus or minus interest - to park in another term deposit.
Originally written by Sharvani Mehrish in July 2019
Photo by Paulina Kuzovkova on Unsplash
