Your term deposit questions answered

With recent interest rate increases from the Reserve Bank of Australia, there has been a boom in interest rate returns for term deposit. Here are the most common questions about term deposit accounts answered.

A term deposit is a savings account that keeps hold of your investment over a set timeframe. The interest rates are often higher than standard savings accounts and are locked in for the duration — which is generally between one month to five years.

You will usually be required to deposit a minimum amount of money to open a term deposit account and this usually can’t be withdrawn unless a special request is made.

On the flip side, a term deposit can be a great option for those who may be tempted to dip into precious savings for other purposes.

The idea is to help your investment grow by making regular contributions and taking advantage of the attractive interest rate offered.

The biggest and most obvious advantage of a term deposit is the interest rate, which can often be higher than standard transaction and savings accounts. This interest rate is fixed, meaning it is protected against any market interest rate drops, but also means it won’t increase if there are increases.

If you are concerned about holding a large amount of money in one account and with one bank, the Federal Government’s Moneysmart website says the Financial Claims Scheme (FCS) can protect deposits made with Australian banks, building societies, and credit unions. You are guaranteed up to $250,000 to replace deposits in the unlikely event of your financial institution failing, but this only applies to authorised institutions regulated by APRA.

Term deposits are stable, long-term accounts designed to put money in, not take money out. Your money is locked in for the agreed period of time (or term) and seeking a withdrawal may result in a fee. Furthermore, the money is not readily available to you, and you may need to seek a special request and wait a period of time before receiving it.

You also need to consider that the interest rate is fixed and market interest rates can fluctuate either up or down during your term.

Keep in mind that all term deposit account providers are competitive and it’s best to do your homework and shop around.

Interest rates can vary depending on when it’s paid to you — monthly, annually or at maturity. If you opt for a lump sum of interest to be paid at maturity, you may be able to obtain a slightly higher interest rate. On the flip side, a monthly interest payment is a boost to your savings and means you don’t have to wait until the end of the term to receive the benefit.

Long-term deposits typically have a higher interest rate than short-term deposits.

If you have a short-term goal, then a short-term account may be just the ticket and will also give you greater flexibility. For long-term savings plans like retirement savings, you may wish to opt for a long-term account.  

It can be more difficult to withdraw money from than a typical savings account. A term deposit account is designed to keep your investment for a fixed term and in most cases withdrawing money would require a special request, a length of time before funds are made available and potentially a withdrawal and/or penalty fee. You may also miss out on a portion of the interest earned.

Your provider will contact you prior to maturity (the date your term deposit ends) to tell you how much interest you have earned and what your options are moving forward.

You can choose to roll over your investment and if you do nothing, your term deposit may roll over anyway. Be aware that this may incur additional fees and the new term deposit may be at a lower interest rate.

The best advice is to review your term deposit a few weeks prior to maturity. That way you can shop around and compare it with other products to ensure you’re getting the best possible deal.

Or you can simply withdraw your money and buy that brand-new car you’ve been saving for.