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Term deposit rates vs bonus savings accounts

Jodie Humphries avatar
Jodie Humphries
- 4 min read
Term deposit rates vs bonus savings accounts

Whether you’re salaried or run your own business, ensuring your money is safe and earning some returns is an integral part of financial planning. 

Two of the most popular low-risk investment options are term deposits or savings accounts. Both options have their pros and cons, and it’s crucial that you compare all of these before you decide which is right for you.

What is a bonus savings account?

A bonus savings account offers a base interest rate plus a bonus rate if you adhere to the deposit and withdrawal conditions specified by the bank. These conditions can include:

  • Making minimum deposits each month
  • No withdrawals
  • Exceeding your previous month’s balance each month

Some of these conditions can be very restrictive, and if you don’t adhere to these, the base rate you will earn instead is typically much lower, thereby reducing your returns.

Your money is accessible at all times if needs be, while conditions like those above reduce the temptation to make unnecessary withdrawals so you can earn the bonus interest rate. 

However, savings account interest rates are variable rates, meaning they are subject to market fluctuation. If the Reserve Bank of Australia were to cut the cash rate, it is likely the savings provider will also reduce its rates accordingly.

What is a term deposit?

A term deposit is a type of account in which funds that you deposit into it are locked away earning a set interest rate for a predetermined period - anywhere from a few months up to five years. 

Your returns are assured, allowing you to lock in a competitive rate of interest with a guarantee of your nest egg growing. You’ll also not be tempted to spend this money because premature withdrawal attracts a penalty. 

However, as the interest rate is fixed, if the Reserve Bank were to hike the cash rate, you would not see your rate increase, as your returns are locked in when you open the account. Additionally, once you invest a certain amount, you can’t increase it.

Choosing between a term deposit and bonus savings account

Your choice between a term deposit and a bonus savings account depends on your situation and present cash flow requirements. Here’s a list of things you should consider:

Rate of interest

Compared to the regular savings account, bonus accounts offer a higher rate, thereby helping you build more money faster. However, the higher rate is available only if you adhere to the conditions, such as making certain deposits at regular intervals or limiting the number of withdrawals.

On the other hand, the rate of interest is fixed for a term deposit, and your returns are not affected by any change to the overall market rates. Often, if you opt for a longer lock-in period, the higher the rate of interest will be.

Investment term

You can keep your money in a bonus savings account for as long as you like, while adhering to the conditions to enjoy the higher interest rate. So, if you’re satisfied with the services and the terms and conditions, you may never have to move your money from the savings account.

In comparison, the investment duration is fixed at the time of opening a term deposit account. The period may vary between one and five years, and the interest rate depends on the investment duration. A short-term deposit is one year or less, while long-term deposits are when the holding period exceeds one year.

Fees

Most bonus savings accounts don’t have any fees as the objective is building money and not spending on setup costs. However, some banks may charge annual fees, setup costs, or ongoing monthly charges. It is important to research these fees before opening the account.

Term deposits also don’t have any setup fees; however, the institution may charge a penalty if you withdraw the money before the maturity date.

Access to your money

A savings account allows you to access your money at all times, which means you can withdraw it when required. However, the higher rate is offered only if you adhere to the deposit and withdrawal conditions.

When you invest your money in term deposits, you can’t access it until the maturity due date. If you do withdraw it earlier, you’ll pay the premature withdrawal penalty.

Where you choose to park your money depends on your financial goals. If you’re searching for ways to grow your money, you may want to learn about different types of investments to build a well-rounded portfolio that matches your risk appetite.

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Product database updated 22 Jun, 2024

This article was reviewed by Personal Finance Editor Alex Ritchie before it was published as part of RateCity's Fact Check process.