If you are considering a term deposit, by far the most common provider of this investment option are the banks.
Banks will offer a range of different interest rates on your term deposit, depending on a number of factors, including the amount of your deposit, the length of the term, and more. So how do you choose the term deposit with the best (or highest) interest rate? Here are a few things to consider.
Who can offer term deposits?
Term deposits in Australia can only be offered by authorised deposit-taking institutions (ADIs.) The vast majority of these institutions are banks and credit unions.
If you are ever unsure if the provider you are considering is authorised, you can check the Australian Prudential Regulation Authority’s list of ADIs. Make sure that you are not looking at another investment product that has been disguised as a term deposit. If the provider is authorised to offer term deposits, it will be on the list.
What factors will influence my term deposit bank interest rate?
There are two main factors that will influence how high (or low) the bank interest rate on your term deposit is – the length of the term and the amount of the deposit.
Generally, you can expect a higher bank interest rate if you invest your money for longer. This incentivises you to lock away your money with the bank for longer. Term deposits may range from as short as one month to as long as 10 years, so make sure you are looking at the interest rate for the right period of time. Many term deposits may be advertised with their highest possible interest rate, but if you are looking to invest for, say, one year rather than five, this bank interest rate may not apply to you.
The amount you are looking to invest will also influence how high your interest rate might be. This is not to say that your interest rate will increase the more you invest, as term deposit interest rates are usually not organised by tiers in this way. However, some term deposits with higher interest rates may also require a higher minimum investment amount.
What type of bank interest rates are there?
Term deposits offer fixed interest rates. This means that your bank interest rate will remain the same for a set period of time. The advantage of this type of bank interest rate is that it cannot get any lower; but by the same token, it also cannot get any higher.
Fixed interest rates differ from variable interest rates, which are more common on transaction or savings accounts. By contrast, variable interest rates can go up or down, at the bank’s discretion.
Will my term deposit interest rate always stay the same?
Not necessarily. Many term deposits will offer an initial or ‘special’ interest rate for a fixed period of time. This could be for all, or even just part of, your initial investment term. If you see a bank interest rate that looks too good to be true, make sure to check that it isn’t just for a short period of time, and always make sure that you know what your bank interest rate will default to after this term.
You also want to make sure you know what your bank interest rate will default to at the end of your actual term, whether that is three months or three years. Many banks will reinvest your term deposit by default, usually for the same period of time – but sometimes at a lower interest rate.
Make sure to stay on top of when your term deposit will end, and find out what interest rate you will default to. It’s at this point that you can shop around for a new bank interest rate, both with your bank and other providers.
Why do interest rates change?
Most banks are for-profit organisations. Higher interest rates on term deposits are usually offered as an early incentive, for either the whole or part of your investment term. These higher interest rates get new customers through the door, and result in more money invested with the banks.
However, as we all know, higher interest rates on term deposits do not last. Banks cannot – or will not – offer these high interest rates indefinitely and still remain profitable. This is why it’s important to stay on top of when your term deposit will end and shop around for new interest rates.
How can I find the best interest rate for my term deposit?
When comparing term deposits, make sure you start by knowing how much you can afford to invest, and for how long. Once you have these two factors decided, you will know what term deposits you are eligible for.
From there, it’s simply a matter of finding the best bank interest rate for your investment amount. Start comparing term deposits and don’t be afraid to shop around outside of your usual bank or provider. You may be surprised at what you find.