A term deposit functions almost like a cross between a savings account and an investment. In this arrangement, you agree to deposit a sum of money with a bank or similar ADI for a specific length of time (or ‘term’), over which you will earn interest on your savings.
Term deposit accounts earn interest at fixed rates, so you can often calculate in advance just how much interest you can earn on a term deposit, they’re often much less risky than investing your savings in other assets, such as shares. Plus, the money you deposit will be guaranteed by the government’s FCS.
However, it’s not always easy to find a term deposit with a high interest rate, so you may not enjoy returns as high as you might with some other asset classes. And even if your lender changes its interest rates during the term, you’ll still be paid interest at the same fixed rate.
Because you agree to deposit your money for a pre-set term length, you won’t have easy access to your money if you need it in a hurry. It’s sometimes possible to end a term deposit early by giving at least a month’s notice, but you may have to pay a penalty fee and/or miss out on some or all of the interest you’d earn.