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How to escape the renew' effect with your term deposit

How to escape the 'renew' effect with your term deposit

Cherie Mildwater looks at term deposits and what to be aware of when your investment reaches maturity.

March 24, 2010

Most of us want to get more for our money, and term deposits are fast becoming a popular short-term option for investors to turn your cash into greater wealth.

Term deposits are sums of money deposited into an account with a fixed interest rate over a certain period, usually ranging anywhere from a month to several years. These are seen as a safer option, hence why they are fast becoming popular for low risk investments.

Nevertheless, there is an important piece of information some financial institutions may hide, and if you don’t ask the question or read the fine print then you may never know: what happens when your term deposit matures?

When your term deposit is approaching its investment expiration date, most financial institutions will contact you notifying you of this and list your maturity options; such as withdraw your funds, reinvest it or add more savings in a new account.

It is up to you to notify the term deposit provider of your decision prior to maturity. If you don’t, most banks will automatically renew your account for the same amount, term and frequency of interest payed. However the interest rate may not be the same and will most likely be set at a lower rate than the original rate.

If you don’t want your savings to be inaccessible for an additional period of time, take action by notifying your financial institution before it reaches maturity. If for some reason you don’t hear from them, make a note in your calendar to call them and state the choice for your investment.

Upon deciding which option to choose from when the term ends, ask yourself the following questions:

  • Do I require the money now?
  • If not, should I renew my term deposit?
  • How long do I want to invest for?
  • Should I reinvest with additional funds (interest received from original term deposit, or other funds) or should I reinvest the original funds?
  • Which financial institution will offer me the best rate?

Comparison websites such as RateCity are available 24 hours a day, seven days a week to assist you in finding some of the highest interest rates on offer for term deposits so you can get the most out of your investment.

RateCity’s average interest rates for one, three and five-year term deposits:

  • One-year: 5.65%
  • Three-year: 6.43%
  • Five-year: 6.48%

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Learn more about term deposits

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 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.

What are Bendigo Bank’s business term deposit rates?

Bendigo Bank offers businesses two types of term deposits - Standard and Gold. You can open a Standard term deposit by investing at least the specified minimum amount for a flexible investment period ranging up to five years. A Gold term deposit requires a larger minimum investment over a fixed term, which is currently one year.

However, you can’t add funds to a Standard term deposit after the first seven days, and any withdrawals before the review date need to be done on request. If you’ve opened a Gold term deposit, you can add more funds over the year, but withdrawals may be restricted just as with a standard term deposit.

A Standard term deposit’s interest rate depends on the amount deposited, the frequency of compounding interest, and the deposit term. Further, this interest rate may apply irrespective of how often interest is compounded. On the other hand, Gold term deposits usually offer a flat interest rate no matter how large or small the deposit, with the interest likely compounded every quarter. 

To find out about Bendigo Bank’s current business term deposit rates, visit the banks’ website.

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.