Term Deposit Guide
Term deposit accounts are one option available to investors who want to get more out of their savings. Term deposits are a fixed term investment which means that your money is ‘locked away’ until the end of the term when it reaches maturity.
Think of a term deposit account like any savings account where you deposit a certain amount of money into the account and you earn interest according to its payment frequency and whether it is compounded and how often, or not compounded at all. However, term deposits come with a fixed rate as opposed to a variable interest rate, and are designed to be left in the account until the end of the term, which means if you need to close the account early or you want to access your money before the term ends, you will be charged a fee.
Term deposits are seen as a safer and less volatile investment option when compared to other investment types such as trading shares on the stock exchange or buying property. They are also quick and easy to set up and once it’s established you just let it earn interest so that you have a guaranteed profit at the end of the term.
If you are considering a term deposit, below are some tips and tricks to learn before you make the leap.
How to choose the right term
There are two main types of periods to choose from, short-term or long-term:
- Short-term: typically short-term deposits are for periods that are less than one year and can start from as short as one month. This option will suit someone who may have a quick savings goal or who doesn’t want to lock their savings away for a long period of time. Some common terms are 90 days, 120 days and 180 days.
- Long-term: anything from 12 months are ruled as long-term deposits and these can last for usually up to five years, although you might be able to find some for up to seven years. If you don’t need access to your savings or if you think interest rates offered for long-term term deposits are at a peak, then this might be a great option for your savings.
When considering the term, be aware that most financial institutions require a minimum deposit, so make sure you read all the details so you are aware of all the terms and conditions attached. Also, term deposit rates are usually tiered, so the more money you invest and the longer you want to deposit your savings, you are likely to receive a better interest rate.
The fees involved
Typically there are no establishment fees, setup fees or ongoing fees with term deposit accounts, but it’s worth checking just in case. However if you decide that you want to break out of your agreement earlier than expected you may be charged a penalty fee.
The penalty fees are calculated differently by financial institutions. Some may deduct a percentage off your interest rate, for example if you were earning 7 percent and their penalty rate was 3 percent, you would only receive 4 percent interest. Some may also charge you a break cost, which will depend on several factors including what the financial institution’s current interest rates were at the time you want to end the term, what rate you received and how much money was in the term deposit account.
The penalty for breaking your agreement is quite hefty so you must be sure that you are ready to lock your money away for the agreed length of time before you sign on the dotted line.
Another fee that you should consider is a cheque drawing fee. Some institutions pay back the interest earned by bank cheque or transfer the money into a transaction account. Be aware that if you choose to receive the money by bank cheque you may be charged a cheque drawing fee, which is around $10, however this depends on the institution.
There are a range of features available on some term deposit accounts. Below we have listed the most common features that you may come across when comparing term deposits and what they could mean to you.
This refers to when the interest is calculated. The most common option is interest paid annually for long-term investments and at the end of maturity for short-term term deposits. Some options may include:
- Annually: interest is paid at the end of every 12 months
- Semi-annually: interest is paid every six months
- Quarterly: interest is paid every three months
- Monthly: interest is paid at the end of each month
- Fortnightly: interest is paid at the end of each fortnight
- Weekly: interest is paid each week
- Maturity: the interest is paid at the end of the term.
Your return on your investment could vary greatly depending on whether the interest is compounded or not, and with the frequency it is calculated. Compound interest is when the interest is added to the balance of your term deposit regularly (such as monthly or annually) as opposed to being added at maturity or transferred into another account.
If you have a number of term deposit accounts or other types of accounts with the one financial institution some may offer the option of providing one statement to cover all accounts rather than one for each. Not only is this better for the environment but it may also make it easier for you to manage your accounts.
This refers to whether your term deposit will automatically roll over into a new fixed term once it reaches maturity. Before your account reaches maturity, you have to notify your institution of what you wish to do with your money, whether you decide to collect or transfer it to another term deposit. If you do not notify them of your instructions before this time, your account may automatically roll over for the same term but the interest rate will not necessarily be the same as it rolls over to whatever the current rate is for that term. It’s best to put a reminder in your diary to compare term deposit accounts online before your term ends.
Partial withdrawal permitted
Some term deposits allow you to withdraw a portion of your money without being penalized. Whether this feature is an option and how much you can withdraw will depend on the financial institution.
Interest paid to different account
At maturity, some institutions allow you to have your balance transferred to your transaction account regardless of whether it is with a different financial institution.
Who offers term deposits?
There are a range of financial institutions including banks, credit unions and building societies that offer term deposits accounts. However each one may offer a different interest rate, term and features so it’s worth your while to compare term deposits online at RateCity. That way you can find one with a higher interest rate and with the features that suit your needs.
Below is a checklist of what you need before you apply for a term deposit. This should make your application process as smooth and simple as possible:
- Personal details such as address, name of the account and phone numbers
- How many people will hold the account – you may be able to add more than one person
- Your transaction account details if they can transfer the money at maturity
- Your driver’s licence number or identification
- Your tax file number. You can usually provide this later if you don’t have it handy, however If you don’t provide this the institution may be required by law to deduct any withholding tax at a higher rate.
- Make sure that you read and understand the product disclosure statement (PDS) so you are aware of all the terms and conditions before you sign.