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A term deposit is an account into which you deposit your money, and it is then locked up for a certain period of time and at a specified interest rate.
During this time your funds are locked, so you cannot access it. If you do, you will usually incur a penalty fee.
When the term ends, you can choose to reinvest (or ‘roll over’) some or all of the funds, or you can withdraw it all.
The right term deposit, with the highest interest, can help you reach your savings goal faster.
What should I look for in a term deposit?
The first thing to look for is the highest interest rate on your money, by shopping around different banks and financial institutions for the best rate. Interest will usually vary with the length of term you deposit your money for and will often be tiered, according to how much money you want to lock in.
Another thing to consider with interest rates is the interest payment frequency. That is, how often interest is paid to you. This may happen monthly, quarterly, annually or when the term expires.
Although most institutions will charge you a penalty fee for withdrawing some or all of your money before the end of the term, some will allow you to withdraw a portion of your money beforehand without being charged (usually called ‘advanced notice’ term deposits). If you think there’s a possibility that you may need to withdraw some of your money early, think about choosing a term deposit with partial withdrawal allowance.
However, be aware that some banks now have a 31-day rule (meaning you need to give 31 days’ notice before you can withdraw) and this information may not be spelled out to you. Check the PDS, or else you could be in for an unpleasant shock if you need access to your money on short notice. The withdrawal penalty could even be greater than the interest you’re earning. That means that, in the worst case scenario, you could get back less than your original deposit.
Is it possible to increase my earnings in a term deposit?
Although it is true that you don’t have much control of your money once you’ve locked it into a term deposit, one way to get the highest interest rates in Australia is to choose a term deposit that offers compound interest rather than simple interest.
Simple interest means that the interest is simply paid on your initial deposit at the end of the term (for example, if you deposit $10,000 at 5 per cent for a year, then at the end you’d get back $10,500). Compound interest means that interest will be paid into your account regularly during the term and will be added to the principal sum. This means that you earn interest on your interest, which therefore makes you more money.
What interest rate should I look for?
All things being equal, you want your term deposit to have the highest interest rates in Australia.
There are a few variables that go into finding the highest interest rate. As mentioned above, they will vary according to the amount you lock in and the length of the term.
On the one hand, if you invest for a short period (such as one year or less), interest rates may increase, meaning that your money is free to reinvest at a better rate (if there is one – remember, rates can fall too).
On the other hand, if you lock in your money for a longer period to secure a good current rate, and interest rates go up, then you cannot take advantage because your money is tied up. You may be able to withdraw early by paying a penalty fee, but that fee could negate any advantage of the early withdrawal and reinvestment.
One way to address these issues is ‘laddering’ your investments. This means not putting all your money into one term deposit but instead having a number of different term deposits, each with different maturity dates. That way, you’re not locking all your money away if rates rise, leaving some money free for you to take advantage of the highest interest rates in Australia.
Final thoughts on interest rates
When the Reserve Bank of Australia sets the official cash rate at a low level, term deposit interest rates can sometimes be lower than the interest you’d earn with a savings account.
That said, by locking in your rate, you also lock in certainty for the term, so you know exactly what your money is doing for you.
As with any investment, it’s a matter of finding the best solution for your personal needs.
Nick Bendel
Property Personal Finance Writer
A property and personal finance writer, Nick Bendel covers property, loans, credit cards, superannuation, and other bank products. Nick has previously written for The Adviser, Mortgage Business, Lifehacker, Business Insider, Yahoo Finance, and InvestorDaily, and loves getting elbow-deep in the latest ABS, APRA and RBA data.
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FAQs
The best interest rate for a fixed term deposit changes all the time, as interest rates move up and down and banks compete with each other to win market share.
To find the best interest rate for a fixed term deposit, it’s helpful to understand how interest rates are applied to term deposits.
There are three factors that determine the fixed interest of term deposits:
- The size of your deposit
- The duration of the term
- The frequency of interest paid
Term deposits vary in duration from one month to five years or more. Interest rates generally work on a sliding scale; shorter terms get a lower rate, longer terms get a higher rate.
Here are a couple of examples of how interest is applied to term deposits.
- A $10,000 term deposit taken out over 12 months, with interest pa