When it comes to choosing a safe place to store your money and earn a return via interest, a term deposit may be a competitive choice for some Australians.
A term deposit allows you to lock away your nest egg at a fixed rate of interest for a set period of time. A short-term deposit may be 3 – 12 months and a longer-term deposit may be 12 months to 5 years. Like a savings account, you will earn a return on your original deposit via the term deposit interest rate offered. However, the interest rate is fixed – so you are guaranteed a certain return over the fixed period. Unlike savings accounts, this will not fluctuate, even if your provider slashes variable interest rates or the Reserve Bank of Australia cuts the cash rate.
A handy feature offered by some term deposit providers automatic rollover allows account holders to automatically start a new term for the same fixed period at term deposit maturity. The rollover term may be less competitive than if you switched to a new provider. However, some providers will offer competitive deals in which account holders who opt for the rollover earn a higher interest rate on their next term.
Term deposits are favourable for those who prefer to set-and-forget their investments, as there is very little upkeep required. You generally don’t need to pay ongoing fees, make regular deposits or meet minimum investments, keep your balance at a certain amount or meet any other common requirements of high interest savings accounts. Once you’ve opened the term deposit, there’s nothing you really need to do but wait until it has matured. Your term deposit may also be linked to your bank account or savings account, so you can easily transfer your matured funds if you choose to close your account.
If you’re the type of saver who constantly dips into their rainy-day fund, a term deposit may be helpful in thwarting those temptations. Term deposit providers will often sting savers for early withdrawal before the maturity date with a penalty fee. And it’s not an immediate process, unlike a savings account. If you need to access the funds in your term deposit early, you will generally need to provide 31 days’ notice. Further, you will need to wait until maturity anyways if there is less than 31 days until the account matures.
Term deposits are considered a low-risk investment option for a number of reasons. One of which is that they are backed by the Australian government guarantee under the Financial Claims Scheme. This government guarantee means that in the event a bank, building society or credit union collapses, deposit products with authorised deposit-taking institutions are guaranteed up to $250,000. If you have more than $250,000 you’d like to invest you may want to consider dividing these funds into multiple accounts with multiple deposit-taking institutions, as it is capped at one per provider.