RateCity looks at the effects of not switching accounts with your term deposit.
Sometimes days can roll together and before you know it months have passed and a new year is upon you. If you are not careful, the same thing can happen to your savings and your investments.
In Australia, Datamonitor recorded that less than one in 20 out of 2100 people surveyed changed their bank in the past year. This means that the 19 out of 20 that don't switch accounts could be missing out on better interest rates. And those who have money tied up in term deposits could be putting their money at risk.
Avoid the trap
If you don't switch your term deposit account then you could be losing out. Unlike savings accounts, for example, term deposits are a fixed investment where you lock your money away with a set interest rate for a specified time. The trick with these types of accounts is that if you don't notify your financial institution of what to do when it reaches maturity, the account will automatically rollover to a new fixed term.
When it rolls over it basically starts again for the original length of time, so if you opened a six-month term deposit account for example, it will automatically roll over into a new six-month term if you don't move it yourself. However it may not earn the interest rate that you originally agreed to, it will earn whatever the current interest rate is for that term. This may not be the best deal at the time and your investment could suffer severely.
Then if you realise at some point - whether it is two days or two months after your account has automatically rolled over - unfortunately you can't do anything about it. You will be lumped with fees for breaking the contract, which are dependent on how much you invested, how long you have left in the contract and the institution.
Make the call
But don't sweat it, this will only happen if you fail to contact your financial institution to make arrangements before it is due to mature. So the solution to avoid this happening is to call the bank and give them instructions of what to do - withdraw or reinvest the money.
But before you do make the call or pay them a visit, you will need to work out which selection best suits you. Here are some tips to help you with your choice:
- Do your homework and shop around by comparing term deposit providers online. This way you can gauge the going interest rates and work out if you can get a better rate elsewhere. For example, the current average rate for a three-year term deposit is 6.42 percent, however on RateCity one of the best rates for a three-year term deposit is at 6.67 percent with Investec (as at August 30, 2010). That is 25 basis points higher.
- Determine whether you will be better off with a short-term or a long-term investment. This will depend on how much time you can afford to tuck your money away before it is needed and which terms are offering the better rates.
If you currently have a term deposit or are thinking of starting a term deposit, make a note in your diary to shop around and compare term deposits to see if you can earn more by switching before it reaches maturity.