Term deposits: which term is most lucrative now?

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April 13, 2011

Investors might assume that when it comes to saving money in a fixed-term deposit the longer you fix your lump sum, the better the rate. And many of the major bank's best term deposit rates support this assumption at the moment.

For instance, by depositing $25,000 for a 12-month term compared with just three-months you will earn at least an extra 0.6 percent on your rate when you bank with any of the major four banks. You'll add more than 3 percent if you bank with Westpac.

Bump up your three-month term deposit to a three-year term for the same sum and you'll currently add as much as 3.3 percent to your rate, when you again bank with Westpac.

Longer not always better
Despite the obvious financial incentives to deposit your money for longer terms, more Australians are opting for three-month terms than any other term available through RateCity.

Shorter terms can often seem more appealing as they offer investors greater flexibility and access to their savings. Costly exit fees often apply to most term deposits too. So a shorter term might be more appealing for those who wish to reassess the market frequently, investing elsewhere once their term matures.

Shorter can be sweeter
Despite some evidence to the contrary, investors can earn higher rates of interest on some short-term deposits than longer ones. And the savings can be easily found by shopping the market at comparison sites such as RateCity.

For example RaboDirect offers a rate of 6.4 percent for a six-month term deposit of $25,000, which is higher than the best term deposit rates offered by all of the major four bank's three-year terms. By comparison, Westpac's three-year term deposit rate is the most competitive of the big four at just 6.30 percent on $25,000, followed by Commonwealth Bank and NAB at 6.20 percent and ANZ at just 6.11 percent.

Pros and cons
The benefits of term deposits are:

  • There's virtually no risk of losing your money.
  • You earn a rate of return that's usually higher than a regular transaction account.
  • The interest rate will not change over the term you select.
  • Term deposits placed in an authorised deposit-taking institution (ADI), of up to $1 million, are guaranteed by the federal government

But term deposits do have their downsides:

  • You cannot easily access your money. You may be able to "break" your term deposit in an emergency, but a penalty is likely to apply.
  • The account may be less flexible and provide a lower income than other comparable products.
  • Honeymoon rates can drop when the investment rolls over.

Term deposit rates vary, depending on the wholesale or "money market" rate movements, so shop around for the best term deposit for the period that suits you.



Related term deposit links

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