Term Deposit Best Interest

31st of March 2012 | by RateCity Staff

Checking Australia’s term deposit best interest rates is a smart option if you are looking to invest your savings over the short-to-mid-term. And a great way to compare the return on various term deposits is by using RateCity’s term deposit calculator.

Usefully, RateCity’s term deposit calculator not only displays the ‘nominal’ interest rate for term deposits, but also the ‘effective’ interest rate, allowing you to compare the potential rate of each term deposit.

Nominal rate

The nominal interest rate is the normal, advertised rate of interest that term deposits pay each year. It is an interest rate that does not take into account any interest that might be paid on interest that you have previously received (which is known as compounding interest – more on that next).

Effective rate

This is the potential rate of interest you could earn on term deposit, once the effect of the regular payments, either credited to your account or compounded into the term deposit during the year are taken into account. The more frequently that term deposits – be they short term deposits, long term deposits or other term deposits – have regular interest payments throughout the year, the greater the effect of compounding, and the higher the effective interest rate.

In the case where term deposits pay interest only once a year, the nominal rate and the effective rate of interest will be the same. However, where interest is credited to your account more than once a year, be paid fortnightly, monthly, quarterly or six-monthly, the effective rate of interest (the actual interest you receive each year) will be greater than the nominal or advertised interest rate – because compounding works in your favour on those regular interest payments throughout the year. Remember, with compounding, interest is paid on interest.

In the case of term deposits where the interest is paid regularly into a separate account, the effective rate may still be higher than the nominal rate. This is because interest paid out earlier has the potential to be reinvested, whereas interest that is not paid until the end of the term deposit does not. The more often interest is paid, the higher the effective rate.

So, as a general rule, when you search for term deposit best interest rates, for many investors the key rate to look out for is the effective rate, and the higher the effective rate, the higher the potential return. Compare term deposits at RateCity to find the effective rate, and a term deposit to suit your circumstances.