Saving up can often feel like an uphill battle, especially if your money isn’t earning you much interest. If you have some spare savings, it might be time to consider a term deposit account. While it may sound a little more complicated than your regular savings account, a term deposit account may be able to offer you more gain without the pain.
In this article we’ll run through how term deposits work and their benefits, and a couple of things to keep in mind.
How do Term Deposits Work?
Term deposits are a type of savings account where you deposit your money for a fixed period of time. During this time your savings are kind of locked away, so you aren’t able to access them. In return, though, your interest rate is fixed and you'll know how much interest your funds will earn. The interest you earn could be paid out monthly, six monthly, or at maturity.
Most banks offer a range of different periods to choose from, which could range from a month to up to five years. At the end of the period (or at ‘maturity’), you can either close your account, renew your term, or alter your term if you’d like to change how long your term is or the way interest is paid.
Interest rates for term deposit accounts can change from time to time as a result of external factors, such as a movement in the Official Cash Rate set by the RBA.
Are Term Deposits Worth It?
Term Deposits VS Savings Accounts
As we mentioned earlier, the biggest drawcard for opening a term deposit is that you’ll be able to lock your funds into a term for a fixed interest rate, allowing you to have the security of knowing how much interest your account will earn for that fixed term.
Another positive is that once your term begins, you don’t really have to do much to manage your account. You don't have to remember to deposit funds each month to earn interest like savings account, which is great if you are short on time. You may prefer this option rather than a savings account where you have to make regular monthly payments.
The biggest drawback to opening a term deposit is that once your term begins, you won’t be able to access your funds until maturity. Most banks will allow you to break your term deposit account early if you need to access your funds, but this will likely be penalised, so be careful.
A further point you should keep in mind is that as your interest rate is locked in, you won’t be able to change it during your term. This can be a positive if interest rates decrease, but if interest rates increase you won’t be able to increase the rate on your account.
To make your term deposit worth it, make sure you consider how long you’d like your term to be. A longer term may provide you with a higher return, but a shorter term may be considered less risky as you’ll have access to your funds sooner, but a lower interest rate may apply.
Either way, if you are wanting a term deposit you should make sure that you have enough funds in your other accounts to cover your expenses to avoid breaking your term deposit early.
Choosing the Right Term Deposit Account - Compare Interest Earned
Now, let’s get into arguably the most important part of a term deposit – how interest is calculated and paid out.
Here at Greater Bank, we calculate interest by applying the daily percentage rate to your account balance based on the length of your term and the amount invested. Our current interest rates for term deposit accounts are displayed on our website.
On our accounts, interest can be paid out either monthly, six-monthly, or at maturity, depending on the length of your term. You can have interest paid out at maturity no matter the term length, but monthly or six monthly interest can only be paid out on terms of six months or longer.
The daily percentage rate applied to your term may depend on how you choose your interest to be paid. Having interest paid at maturity may give you a slightly higher interest rate than interest being paid monthly, but having it paid out monthly means that you are getting a bit of money into your everyday or savings account each month rather than waiting until maturity.
If you wanted to learn more about compound interest and how interest is calculated on your savings accounts, you can check out one of our other guides.
How to Compare Term Deposit Accounts
While term deposits work in similar ways across the market, it’s always a good idea to compare different banks and what they’re offering, especially if you’re looking for a specific feature.
1. Rates
The first thing you can compare when choosing a term deposit is the rate on offer. When comparing, keep in mind that banks may offer different rates depending on how long your term is or how much you invest, so make sure you’re comparing the right rate for the term you’re interested in.
2. Term lengths
Picking a term length that suits you is crucial, so make sure to compare what banks across the market have to offer. Most banks will allow you to invest for a term as short as a month or up to five years, but some may offer more flexibility when choosing a term length. For example, some banks may only allow you to open term deposits for set intervals, such as for six months, 12 months, or 24 months. Others will allow you to customise your term length a little more, for example you’d be able to choose a term of five months or eight months.
3. Minimum investment amounts
Another important point to consider is the amount of money you’d like to invest. If you’re looking to invest a small amount of money, it is particularly important to compare different banks, as they may have different minimum deposit requirements.
4. Paying out interest
Knowing how you want your interest paid out can help you compare term deposit accounts as well. Depending on your term length or amount, some banks may only pay out interest at maturity, whereas others will allow you to choose when your interest is paid out.
How to Set Up Term Deposit Accounts
The requirements to open an account may vary from bank to bank, but generally term deposits can be opened by businesses as well as individuals, and can be opened as a single or joint account. To open an account you’ll need to have an Australian residential or business address, and you’ll need to present a valid ID, such as a valid Australian driver licence or passport.
Term deposits can usually be opened and managed online if your bank offers online banking, but you may have to open an everyday or savings account with your bank if you don’t already have one.
Before your term matures, your bank will usually give you a heads up so you can decide whether you’d like to renew your term or release your funds.
We’ve prepared a couple of other things to keep in mind before you open and set up your account:
- Be on the lookout for any special offers when opening an account. You may be able to claim a higher rate than usual or your bank may waive its usual fees. Keep in mind though that you may not be automatically eligible to continue to receive your offer if you renew your term after it matures.
- Make sure you’re aware of any fees and charges that may apply when setting up or maintaining a term deposit account. Be sure to read the terms and conditions, or chat with a customer service officer before proceeding.
- If you choose to close your account before the maturity date, you may be charged a heavy account breaking fee. In addition, you will likely receive a reduced amount of interest if you break your account.
This article is intended to provide general information of an educational nature only. This information has been prepared without taking into account your objectives, financial situation or needs. Therefore, before acting on this information, you should consider its appropriateness having regard to these matters and the product terms and conditions. Terms, conditions, fees, charges and credit criteria apply. Information in this article is current as at the date of publication.