Interest rates have risen for five consecutive months and are anticipated to continue rising over coming months as the Reserve Bank of Australia (RBA) attempts to put the brakes on rapidly rising inflation.  

For those looking to make the most of the recently increased interest rates, high interest savings accounts and term deposits are two popular account options. But what are the differences between them and how will they be affected by anticipated interest rate rises – or falls?  

Term deposit and high interest savings accounts are two similar but slightly different account options for depositing cash assets.  

• Term deposit accounts: A term deposit account is a type of savings account which offers a fixed interest rate for a set period of time (this can be between one month to five years). Your savings will be locked away for the term you select, and you can’t add or remove funds in that time without financial penalty.
  
  Interest earned can be paid at maturity (the end of the term length) or at set intervals during the term (usually for a lower interest rate), depending on what your institution offers and what you select. One example of a term deposit is National Seniors Term Deposit account.  
   

• High interest savings account: A high interest savings account is a bank account that usually pays a higher rate of interest on your savings than other transaction accounts.
  
  In most cases, interest earned is paid monthly, however this can vary depending on your financial institution. One example of a high interest savings account is National Seniors Money Manager account.  

See how the two account types compare below.
 

The RBA is expected to continue lifting the official cash rate over coming months and subsequently, the interest rates offered for high interest savings accounts and term deposits are also expected to increase.  

How will interest rate rises affect my existing high interest savings or term deposit account?  

• High interest savings accounts: If you already have a high interest savings account, you should see higher interest rates passed on by your financial institution since your interest rate is variable. Now is a good time to compare your interest rate to others in the market to see if it’s still competitive.
  

• Term deposit accounts: If you have a term deposit, your interest rate is fixed so your rate will not change before maturity. If your term deposit is due to reach maturity soon, shop around see what rates are being offered by other financial institutions, as well as what your financial institution will offer if you renew.
  
  If no action is taken at maturity, your financial institution may automatically roll you over into another term with the same interest rate and term length as your previous one. This rate may no longer be competitive, so get in touch with your financial institution ahead of time to find out what happens at maturity.  

Should I open a high interest savings or term deposit account? 

Before you open a high interest savings account or term deposit account, there are a few things you should consider.  

• Interest rate changes: Consider how interest rates might change over the coming months or years and how they will affect each account type. The variable rate offered by high interest savings accounts will allow you to benefit from interest rate rises but if interest rates decline so too will your interest rate. Term deposits offer fixed term rates, which protect against interest rate declines, however you could also miss out on further interest rate rises if they occur. 

• Adding or withdrawing funds: Will you need to access your deposited funds? Term deposits lock your money away for the term and can’t be withdrawn without penalty. You also can’t add funds during your term. This can be beneficial if you think you might be tempted to spend the money. High interest savings accounts, however, allow you to add or withdraw at any time.
  

• Your goals: What are you aiming to achieve with these savings? For short-term periods (up to one year) high interest savings accounts can often offer more competitive interest rates than term deposits, which tend to offer better rates for longer term lengths. Over medium-term periods (one to five years), term deposits may offer a more competitive interest rate than high interest savings accounts, and the fixed rate could protect you from any interest rate declines that may occur during that time.  

The RBA has been raising interest rates to curb inflation, but should they be too successful, they may need to go the other way and lower interest rates to stimulate the economy.  

If this occurs, savings accounts offering a variable interest rate (like a high interest savings account) could lower their interest rates.  

On the other hand, savings accounts offering fixed interest rates (like a term deposit account), will not be impacted during their contract period, but new accounts and renewals will likely be offered a lower interest rate. 

While you should weigh up what could potentially happen with interest rates in coming months and years and how that could impact your savings and goals, it shouldn’t be the only factor in your decision-making process.  

As always, before making any major financial decisions, it is strongly recommended to speak with a financial advisor to get advice tailored to your personal circumstances, goals, and values. 

Please note: all insights and information provided in this article should be considered general advice for educational purposes only. As we’re unaware of your personal circumstances, information in this article should not be misconstrued as personalised financial advice. We recommend seeking advice from a qualified financial professional before making any major financial decisions. 

Sources: Moneysmart Source 1, Moneysmart Source 2, Moneysmart Source 3