What to consider before choosing a term deposits
Compare and calculate interest rates, returns, fees and more.
If you’re considering a term deposit to grow your investments, here are some tips and tricks to learn before making the leap.
Term deposit accounts are one option available to investors who want to get more out of their savings. Term deposits are fixed-term investments, which means your money is ‘locked away’ until the end of the term when it reaches maturity.
Think of a term deposit account like a savings account, where you deposit a certain amount of money and earn interest on your savings. How much interest you’ll receive not only depends on the term deposit’s interest rate, but its payment frequency, whether it is compounded, and if so, how often.
Term deposits earn interest at a fixed rate rather than a variable interest rate, and are structured to keep your savings in the account until the end of the term. If you need to close the account early or want to access your money before the term ends, you will likely be charged a fee.
Term deposits are often seen as safer and less volatile investment options compared to some other investment types, such as trading shares on the stock exchange or buying property. They are also quick and easy to set up, and once established you just let them earn interest, so you can expect a near-guaranteed profit at the end of the term.
Once you’re confident that a term deposit would allow you to securely grow your wealth and achieve your short or long term savings goal, it’s time to start your search for specific term deposit options.
Who offers term deposits?
There are a range of financial institutions that offer term deposit accounts, including banks, credit unions and building societies. However, each one may offer a different interest rate, term and features, so it’s worth comparing term deposits online at RateCity, to find one with an interest rate and features that suit your needs.
This checklist summarises what you may need before you apply for a term deposit, to help make your application process as smooth and simple as possible:
- Personal details such as name, address, and phone numbers
- How many people will hold the account – you may be able to add more than one person
- Your transaction account details for transferring the money at maturity
- Your driver’s licence number or identification
- Your tax file number. You can usually provide this later if you don’t have it handy, however If you don’t provide this the institution may be required by law to deduct any withholding tax at a higher rate.
- Make sure that you read and understand the product disclosure statement (PDS) so you are aware of all the terms and conditions before you sign.
There are two main types of term deposits to choose from: short term and long term.
When considering the term, be aware that most financial institutions require a minimum deposit, so make sure you read all the details to be aware of all the terms and conditions. Also, term deposit rates are usually tiered, so the more money you invest and the longer you want to deposit your savings, the better the interest rate you’re likely to receive.
Short term deposits
Typically, short term deposits are for periods of less than one year, and can start from as short as one month. This option may suit someone with a quick savings goal, or who doesn’t want to lock their savings away for a long period of time. Some common terms are 90 days, 120 days and 180 days.
Long term deposits
Deposits longer than 12 months are ruled as long-term deposits. These can usually last for up to five years, although you might be able to find some that last as long as seven years. If you don’t need access to your savings, or if you think interest rates are at a peak, then this might be an option for securely growing your savings.
Typically, there are no establishment fees, setup fees or ongoing fees with term deposit accounts, but it’s worth checking just in case.
If you decide that you want to break out of your term deposit agreement earlier than expected, you may be charged a penalty fee. The penalty for breaking your agreement can be quite hefty, so you should be certain you are ready to lock your money away for the agreed length of time before signing on the dotted line.
Penalty fees are calculated differently by different financial institutions. Some may deduct a percentage off your interest rate – for example, if you were earning 7% interest and the penalty rate was 3%, you would only receive 4% interest if you broke your agreement. Some banks may also charge you a break cost, which may depend on several factors, including the financial institution’s current interest rates, what rate you received, and how much money is in your term deposit account.
Cheque drawing fee
Some institutions pay back the interest earned on your term deposit by bank cheque, or transfer the money into a transaction account. If you choose to receive the money by bank cheque, you may be charged a cheque drawing fee, which is often around $10, though this depends on the institution.
There are a range of features available for term deposit accounts. Here are some common features you may encounter when comparing term deposits, and what they could mean for you:
Payment frequency refers to when interest is calculated on the savings in a term deposit. The most common options are interest paid annually for long-term investments, and at the end of maturity for short-term term deposits.
Some options may include:
- Annually: interest is paid at the end of every 12 months
- Semi-annually: interest is paid every six months
- Quarterly: interest is paid every three months
- Monthly: interest is paid at the end of each month
- Fortnightly: interest is paid at the end of each fortnight
- Weekly: interest is paid each week
- Maturity: the interest is paid at the end of the term.
The return on your investment could vary greatly depending on whether the interest is compounded or not, and the frequency of interest calculations.
Compound interest is when the interest is regularly added to the balance of your term deposit (e.g. monthly or annually), rather than being added at maturity or transferred into another account.
If you have several term deposit accounts or other products with the one financial institution, you may be offered the option of having one statement cover all of your accounts, rather than receiving separate statements for each. This can make managing your accounts much easier.
This refers to whether the savings in your term deposit will automatically roll over into a new fixed term once your current term deposit reaches maturity.
Before your account reaches maturity, you should notify your institution of what you wish to do with your money, whether you decide to collect or transfer it to another term deposit. If you do not notify them of your instructions before this time, your account may automatically roll over for the same term, but not necessarily the same interest rate, as it will roll over to whatever the current rate is for that term.
It’s often worth putting a reminder in your diary to compare term deposit accounts online before your term ends.
Partial withdrawal permitted
Some term deposits allow you to withdraw a portion of your money without being penalised. The availability of this feature and how much you can withdraw will depend on your financial institution.
Interest paid to different account
At maturity, some institutions allow you to transfer your balance to your transaction account, even if it is with a different financial institution.