If you’re looking for a relatively low-risk investment, you may be considering a long term deposit.
It’s a forced-saving option and, if you can lock in a good rate from the lender, you have the potential to make decent financial returns.
However, as with any investment, it’s important to decipher whether it’s right for you and what possible risks apply.
What is a term deposit?
A term deposit is an amount of money set aside with a lender for a fixed amount of time. The lender returns your money, plus an agreed amount of interest, on the completion of the term deposit.
For example, Sarah makes a term deposit of $10,000 term deposit with a lender. It’s for a term of 12 months with an agreed interest rate of 3 per cent.
At the end of that 12-month term, the lender returns Sarah’s $10,000 deposit plus the $300 earned in interest.
Term deposits can be a great option if you’re an undisciplined saver, as your money is essentially locked away for a fixed period of time. You can also choose between short and long term deposits, pick the amount of money given to the lender and decide on the length of the term that best suits your needs – so you have a considerable amount of control.
What is the difference between a long term deposit and a short term deposit?
A long term deposit usually applies to a term deposit that is longer than 12 months. Generally, the longer the term deposit, the better interest rate you’ll receive from the lender. Think of it as a bigger reward for letting them mind your money for a longer period of time. Long term deposits are a great ‘set and forget’ investment option, as you can pass on your sum of money and forget about it while you build up interest. However, if for some reason you require the money before the term deposit is up, you can be penalised.
A short term deposit generally refers to a deposit that’s locked in for less than 12 months (usually the minimum is one month). The main reason you’d choose a short term deposit is the benefit of being able to reach your money sooner – especially if an unforeseen emergency occurred or your financial circumstances changed unexpectedly. It also gives you to opportunity to shop around for a better rate once the term is up, instead of being stuck with one rate for several years.
How do you know which term deposit length is best for you?
The simplest way to choose a term deposit is to match it to your financial goals. If you want to make money in the short term (perhaps for an overseas trip or to pay for house renovations), then a short term deposit will probably work better for you. Short term deposits can also be a good choice if you’re a first-time investor and feel nervous committing to anything long-term.
Alternatively, if you have longer-term financial goals, have more cash or assets at your disposal, and are comfortable locking away a sum of money for a longer time, then a long term deposit is probably better suited to you.
What are the pros of long term deposits?
- Term deposits often rival the interest earned on savings accounts – even high-interest savings account
- You can lock in one interest rate for the length of the term
- You have the option to lock your funds away for up to 10 years
- They’re a great savings tools, as you can’t withdraw your cash once it’s with the lender
- Long term deposits can be less volatile (therefore lower risk) than other investment options
- The longer the term, the higher the interest rate you’re likely to receive
- Unlike high-interest savings accounts, there’s no requirement to make a minimum deposit each month – hence they’re easier to manage
What are the cons of long term deposits?
- If your financial circumstances change, and you need to access your funds before the end of the agreed term, you’ll likely be penalised
- Long term deposits require forward-thinking to ensure the term deposit suits your long-term financial needs
What should I consider before taking out a long term deposit?
Most financial institutions offer long term deposits, so always do you research to ensure you get the best rate.
It’s also essential that you choose a term deposit that won’t interfere with your financial future. Check the termination fees that apply to the term deposit, as there’s always a chance you’ll need to withdraw your money before the end of the agreed term.
Also, before taking out any investment option, you might want to speak to a professional to make sure it’s right for you.