Aussies' love of liquid grows

Aussies' love of liquid grows

June 30, 2011

With the wounds of the global financial crisis still fresh, Australians have changed their attitudes to investing and are holding more cash within their portfolios than in the past, according to research from CoreData.

Australian Prudential Regulation Authority (APRA) figures reveal a corresponding jump in the amount of money being invested in deposit accounts (such as term deposits and savings accounts) further indicating Australia’s new penchant for more liquid assets.

As a nation we have $497 billion sitting in bank accounts, which is $40 billion more than last year, according to APRA’s April data. And that’s not including the money deposited in non-banks. Most estimates add another $50 billion to APRA numbers to account for the non-bank sector.

The good news is that interest rates on term deposit accounts are increasing too. Rates on terms from 30 days up to 12 months are up seven basis points on average since January (for $50,000 deposits), according to RateCity data.

Easy money
Rates on the most popular term for investors, three-months, increased the most by 14 basis points on average in six months. So the average three-month term deposit (nominal) interest rate is now 5.16 percent, which is the highest it’s been in 18 months.

Damian Smith, chief executive of RateCity, says term deposits provide an easy win for banks to raise capital while taking advantage of Australian’s confidence in cash.

“There are obviously a lot of worried Australians out there who prefer to invest in safer options like savings accounts and term deposits. In keeping with the APRA data, we’ve seen a 34 percent increase in applications for term deposits via RateCity compared to six months ago,” he says.

These types of investments are the lowest risk options on the market because they offer a guaranteed rate and your money is safely locked away for a set period of time while earning interest. But do they offer the best yield?

Maximise your return
It has long been known, but rarely publicised, that financial institutions are willing to negotiate their term deposit rates if you give them a call and ask. But a new online platform at RateCity means you no longer have to make that call.

It’s a new private quoting tool, powered by DealMax, which allows savers to enter a secure environment, fill in their details and be offered exclusive best-of-the-day deals on term deposit rates directly from the institutions. By comparing term deposit accounts in this way, savers can potentially find deals of up to 105 basis points better than what institutions advertise.

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Learn more about term deposits

Which bank has the best term deposit rates?

If you’ve been shopping around for a term deposit, you might be wondering which bank has the best term deposit rates.

Term deposit rates will generally be affected by the amount you choose to deposit and whether you opt for a short or long term deposit.

Longer term deposits tend to have higher interest rates than shorter terms. The trade-off for earning a higher interest rate on your term deposit is that you can’t access your funds for the duration of the term deposit.

When comparing which bank has the best term deposit rates, it pays to do your research and compare how your funds will fare over the short and long term.

Unlike home loans or savings accounts which give you the option of fixed or variable rates, term deposits are always fixed, which means you get a guaranteed amount of interest over the term of the deposit.

How long is a term deposit?

A term deposit refers to when you lock your money in an account for a certain period of time and at a specified interest rate. You will not be able to access your money for the length of the agreed term without incurring a penalty fee.

A long term deposit generally refers to a term deposit that lasts for more than 12 months – which in some cases may be as long as 10 years.

Usually, the longer you store your money, the better the interest rate you’ll get, so a long term deposit will tend to pay higher interest than a short term deposit.

At the end of the term, you can roll over the money (plus the interest you’ve made during the term), or you can withdraw it all.

How do term deposits work?

Term deposits are flexible, low-risk, and earn you interest over time. But before you apply to open a term deposit, you might be wondering: how do term deposits work?

A term deposit is an agreement you make with a financial institution. This agreement will specify a certain amount of money that you will give the bank for a certain amount of time. In return, you’ll earn a fixed amount of interest on your deposit throughout your term.

Term deposits work as an exchange between a financial institution and an individual. You can think of your term deposit as a loan to the bank. Because you’ve loaned the bank your money, they’re willing to pay you interest on your deposit.

What is a term deposit rate?

The term deposit rate is the agreed interest rate for your term deposit. It remains fixed for the term of the deposit.

For example, if you deposit $5,000 for 12 months at a 2.5 per cent term deposit rate, that 2.5 per cent term deposit rate will be fixed for the entire 12 months and won’t change until the term matures.

The term deposit rate is one of the most important factors to consider when comparing your term deposit options. The general rule of thumb is that the longer the term, the higher the term deposit rate.

Term deposits are a popular type of investment because they’re safe and provide reliable returns.

The return you get on your term deposit will be determined by the amount you initially invest, the amount of time you choose to invest it for, and the term deposit rate.

Can you add money to a term deposit?

When you open a term deposit, you agree to lock your money away for a set period and earn a fixed amount of interest during that period.

Where everyday transaction accounts give you the flexibility to deposit and withdraw funds as frequently as you like, term deposits trade flexibility for higher interest rates.

Once your funds are deposited in a term deposit, they’re fixed for the length of the term, meaning you can’t add additional funds midway through the term.

When the term deposit matures, you may have the option to add additional funds and roll the funds over for another term, or you may choose to withdraw the money at that point.

If you have extra funds to invest, you could consider opening an additional short term deposit account or a high-interest savings account.

It’s worth noting that you can withdraw the funds midway through the term, but a penalty is likely to apply.

How safe is a term deposit?

You may have heard that a term deposit is a type of investment, different to a traditional savings account. All investment comes with inherent risk, so it’s important to know how safe a term deposit is before committing.

Term deposits offer a fixed interest rate which is guaranteed, so you do not have to worry about rising or falling interest rates when investing. You can add up how much interest you will earn over your fixed term, and this will be paid into your account per the conditions of your term deposit.

Term deposits with authorised deposit-taking institutions are also guaranteed for up to $250,000 by the Financial Claims Scheme, so you don’t have to worry about the bank collapsing either.

The only inherent risk of a term deposit is if you may need to break it early. If this happens, you will need to pay a breakage fee and possibly sacrifice some of your interest as a penalty. But if you know you can invest a certain amount of money for a fixed period of time, you can rest assured that a term deposit is a safe investment option.

Are term deposits worth it?

Ultimately, whether term deposits will work for you will depend on your particular financial needs.

Term deposits can be a great way to get your money working for you. By locking it away and forgetting about it for a period of time, it can earn interest for you. If you have the interest paid on a regular basis, rather than at maturity, you can either have some extra spending money or you can reinvest it into the term deposit to compound.

Of course, locking your money in a term deposit means you cannot access it for the length of the term, without paying a penalty for early withdrawal. This can remove the temptation to spend the money, while it also earns interest.

Is a term deposit an asset?

The short answer is yes – a term deposit is, indeed, an asset.

Regardless that the funds are locked away for a fixed period, when it comes to the balance sheet, it’s considered an asset.

Aside from being an asset, term deposits are also cash investments which are held at financial institutions like banks or credit unions.

Term deposits work by investing a set amount of cash in a bank account for a fixed period at a fixed interest rate.

When you deposit your money in a term deposit, you’re agreeing to lock it away for a predetermined period, ranging from short-term periods of one month all the way to long-term periods of up to 10 years.

Term deposits are a popular way to boost your bottom line by investing your money and increasing the value of your asset.

How often do term deposit rates change?

One of the advantages of a term deposit is that this type of investment enjoys a fixed interest rate. This means that the interest rate that you have signed up for will not change during the period of your term deposit, regardless of rising or falling market interest rates.

However, it is important to be aware of the end of your term deposit. Once your term ends, whether this is in three months or three years, many banks will default to rolling over your deposit into a new term, sometimes with a lower interest rate. Once your term deposit rolls over, you will then be locked into this new fixed interest rate for another term.

Make sure to use the grace period at the end of your term to your advantage. Shop around for a competitive interest rate and reinvest your money accordingly.

What is a short term deposit?

Sometimes you only want to tie up your money for a short period, maybe because you want to make a quick return on a large sum, or just to have more flexibility and access to your money. That’s where a short term deposit can come in.

Short term deposits are usually less than 12 months (e.g. 30 days, 90 days, six months or 12 months), though you will still not be able to access your money for the length of the term without incurring a penalty fee.

At the end of the term, you can roll your deposit over, or you can withdraw it. An advantage of short term deposits is that you can take advantage of higher interest rates with a different financial institution, if they are available.

What is a fixed term deposit?

A fixed term deposit is a safe and stable way to earn a fixed return on your cash investment.

Fixed term deposits are essentially bank accounts where you lock your money away for a fixed period and earn a fixed interest rate on those funds.

Fixed term deposits can be both short term, which is usually anything under 12 months, or long term, which can be up to 10 years.

Once the fixed term has ended, the bank or financial institution will give you back your initial deposit plus any interest you earn during the fixed term period.

Depending on the type of fixed term deposit account you open, when the term matures, you may have the option of rolling the funds over for a new term or withdrawing the funds.

Unlike other savings or transaction accounts which offer variable interest rates and flexible features, fixed term deposits offer fixed interest rates, which means the amount of interest you earn will remain the same during the term of the deposit.

What is a term deposit account in a bank?

A term deposit account in a bank is a type of investment where you lock away a portion of your savings for a fixed period in return for earning a set amount of interest.

Opening a term deposit account in a bank is a safe way to earn a stable return on your investment of cash.

Term deposit accounts can be a good way to give your savings an extra boost without the need to actively watch or manage your funds during the term of the deposit.

Term deposit accounts in a bank are a popular type of investment because they’re safe and there’s very little risk that you could lose your money.

If you make a term deposit of up to $250,000 with an authorised deposit-taking institution, it’s guaranteed by the Australian government, which means there’s virtually no risk of losing your money and you’re guaranteed return.

Interest rates vary depending on the length of the term, the amount you deposit and the bank you choose.

What is a term deposit?

A term deposit is an investment savings account. A term deposit usually pays a higher rate of interest than a regular savings account, with the interest rate fixed for the term (or duration) of the deposit.

You can open a term deposit account for one month or up to five years depending on your investment goal, and invest as little as $500 to start earning a profit.

With a term deposit, you get to decide how much you want to invest (the principal or deposit), for how long (the term or duration) and the frequency of interest payments.

A term deposit represents a secure form of investment, unlike trading in shares or purchasing real estate. And a term deposit up to $250,000 is protected by the government guarantee.

Can students make term deposits?

If you are a student who has managed to save some money and are looking for a safe investment option, you may be considering a term deposit. Most term deposits (and other bank accounts) are open to anyone who is at least 18 years old.

There are also some term deposits open to younger students, some even without an age limit. These term deposits are usually opened on the student’s behalf, by their parent or guardian.

A term deposit is generally a safe investment option, especially if you want to make sure you can’t touch your savings for a set period of time. If you are 18 or older, shop around for a competitive interest rate before committing. If you are under 18, speak to your parent or guardian to get started.