A fixed term deposit is a great form of investment. It presents a safe and secure means of protecting your money (government-guaranteed up to $250,000) while providing a fixed-return on your principal.
You might not get the same peace of mind from a real estate investment, or trading in shares. As an investment, a fixed term deposit offers a great deal of flexibility too.
You decide how much you want to invest (the principal or deposit), for how long (the term or duration), and the frequency of interest payments.
These three factors influence the interest rate you're awarded for the duration of your investment.
That makes a fixed term deposit different from a rental property, which offers an uncertain rate of return, or the daily price of a share.
Most banks, credit unions and building societies offer term deposits at fixed rates of interest. The interest rates for term deposits do vary, so it pays to follow the market and lock in at a good rate.
Another key difference between a fixed term deposit and other types of investments is that you don’t need a fortune to start. Most term deposits require a small deposit of around $5,000 to open.
By investing in a fixed term deposit, you could turn a small sum into a deposit for a mortgage. And it’s very easy to get started investing in term deposits.
How do I open a fixed term deposit?
A fixed term deposit can be opened in the same way you would open a bank account. This can be done online or at a branch in as little as 10 minutes.
The basic information you would need to provide is:
- Identification (passport, driver’s licence, proof-of-age card and/or Medicare card)
- Australian residential address
- Tax file number (TFN) or a TFN exemption
If you’re a tax resident in another country, you may need to provide a foreign tax number.
Also, you would need the minimum deposit required and, depending on the bank, an existing bank account. (You would have to open a bank account if you didn’t already have one.)
How do I choose a fixed term deposit?
Choosing a fixed term deposit is the fun part, and a good starting point is to compare term deposit interest rates via a comparison site like RateCity.
The duration of a fixed term deposit can be anywhere from one month to more than five years. And generally speaking, the longer the term, the greater the interest rate you receive.
It’s then a matter of how long you want to keep your cash locked away. While you can withdraw money during a term deposit, doing so may reduce the interest you’re paid (as a penalty).
While researching fixed term deposits, keep a lookout for bank deals or term deposit specials. These are offers available for a limited time, and give you a higher interest rate than deposits of longer terms.
Another consideration for your fixed term deposit is how often you want the interest paid. As a general rule, he more frequently, the lower the rate. Some term deposits only pay interest at maturity or annually.
To guarantee yourself the maximum earning potential of your fixed term deposit, opting for interest to be paid at maturity (or the end of the term) is usually the way to go.
Think of a fixed term deposit as an investment rather than an interest-bearing savings account. This perspective will help you choose the right product and keep you focused on the prize.
Can I withdraw from a fixed term deposit?
Yes, you can withdraw money from a fixed term deposit, although it defeats the purpose of having one. There are interest-bearing savings accounts that let you take money out when needed.
The key thing to remember about a fixed term deposit is that if you withdraw money during the term, you may have your interest reduced.
And if you do want money, you’re often required to give around 31 days’ advance notice to make an early withdrawal.
So, when you open a fixed term deposit, either keep the term at a manageable minimum (so you’re not tempted to withdraw money) or don’t deposit all your savings. Keep some in your regular account.
What’s the government guarantee?
The Australian government has guaranteed deposits up to $250,000. The guarantee is capped per person, per financial institution.
That means that your term deposit (if it’s $250,000 or less), is protected by the government guarantee in the unlikely event the bank, building society or credit union collapses.
If you have more than $250,000 in a fixed term deposit with one the one bank, for example, then only up to $250,000 of your principal is guaranteed.
If you’ve got more than $250,000 and you wish to invest in a fixed term deposit, you could consider dividing your money between multiple term deposits and banks.
The government guarantee is another aspect of fixed term deposits that make them a less risky choice of investment.