Low-maintenance and low-risk, term deposits are a popular way to earn interest and grow your savings.
Term deposits offer a range of benefits, one of which is being covered by a government guarantee. This guarantee ensures that your money is safe and your savings are secure.
What is a term deposit?
A term deposit is an agreement you make with a financial institution that allows you to deposit a certain amount of money for a specified amount of time.
You can think of a term deposit as a loan to the bank. The money that you loan the bank earns interest during your term, and at the end of your term, you can collect your original deposit along with the interest it has earned.
It’s important to understand that investing in a term deposit means you’re not able to access your money during your term. For example, if you open a 12-month term deposit, you cannot withdraw or deposit and money for one year (unless you’re willing to pay a penalty fee).
What are the benefits of term deposits?
One of the most beneficial advantages of a term deposit is the flexibility it offers. With term deposits, you’re able to choose how much you invest, and for how long. This flexibility will allow you to invest only what you can afford, and to invest only for as long as you prefer.
Another benefit of term deposits is the interest your balance will earn. Term deposits tend to offer higher interest rates than other bank accounts, particularly if you’re investing a large amount of money for an extended period of time. For example, you’ll likely be able to secure a higher interest rate for a $500,000 term deposit than for a $5,000 deposit.
Term deposits can also help you manage your spending so that you can make a large purchase, like a car or house. Because you’re not able to access your deposit for a specific amount of time, it will keep you from spending that portion of your savings.
Are term deposits covered by a government guarantee?
The Australian government’s Financial Claims Scheme covers term deposits opened with authorised deposit-taking institutions (ADIs), but there are a few caps and restrictions that you should understand.
The first is the $250,000 cap. This cap means that up to $250,000 per person per institution is covered by the government guarantee. It’s important to note that this cap applies per institution, which means that deposits housed in separate institutions will each be covered up to $250,000.
What are the benefits of being covered by the government guarantee?
The most significant benefit of the government guarantee is stability. When the government guarantee was introduced, it sought to provide financial system stability in Australia, and the guarantee continues to promote this stability.
It’s unlikely that your deposit will ever need to be covered by the government guarantee scheme, but it gives peace of mind to customers and makes sure they feel secure in trusting financial institutions with their savings.
How do I know if my term deposit is covered by a government guarantee?
The government guarantee is designed for term deposits of up to $250,000 in designated financial institutions, but if you want to know more about how your money is covered, it’s best to talk with your bank or credit union. They’ll be able to discuss your particular deposit and what the guarantee means for your money.
Are other types of accounts covered by the government guarantee?
The government guarantee scheme covers more than just term deposits. The scheme also insures savings accounts, transaction accounts and trustee accounts, just to name a few.
How long will the government guarantee my deposit?
Your account is covered by the government guarantee for as long as your deposit remains in your account. Whether you’ve opened a term deposit for six months or six years, the government guarantee will apply throughout your entire term.
What else should I know when I open a term deposit?
It’s important to understand how your money is covered by the government guarantee, but you should also be aware of other term deposit features, such as automatic rollover and early withdrawal fees.
Automatic rollover refers to the bank’s policy of automatically rolling your money into a new term deposit if you don’t respond at the end of your term. Automatic rollover can be a problem because the term deposit your money is automatically deposited into might not be the best deal on the market. Setting yourself a reminder for when your term ends is a good idea to prevent automatic rollover.
You should also talk with your bank about their early withdrawal fees before opening a term deposit account. An early withdrawal fee usually applies if you need to access your deposit balance before your term has expired. These fees vary from institution to institution, so it’s best to discuss the early withdrawal policy with your chosen bank.