A term deposit is a neat way of making your money earn money. You can open a term deposit for one month or up to five years – or even longer – depending on your investment goal.
And depending on the bank, building society or credit union, you can deposit as little as $1,000 to kick-start your term deposit.
You make money on a term deposit via the interest earned on your principal (or deposit). The interest on term deposits is fixed for the duration (or length) of the term.
For many term deposits, you can decide when the accrued interest is paid. It’s usually a choice of monthly, quarterly, half-yearly, annually or at maturity.
The frequency with which your paid interest will affect the fixed rate you receive. Generally speaking, the less frequently you want to be paid interest the higher the rate you’ll get.
Term deposits are all about interest, so it’s good to know how interest is earned and paid during the term of a deposit.
How is interest calculated on term deposits?
Interest begins to accrue from day one of your term deposit and is calculated daily during the term (even if the interest isn’t always paid daily). How often your interest is paid to you will depend on the length of your term.
Some term deposits don’t give you the choice and pay interest only at maturity, or once the term is complete.
While there are no term deposits with interest paid daily, all term deposits accrue interest daily.
The interest rate applying to your term deposit will depend on the deposit amount, term and interest frequency the date of your application.
You could opt for the interest to be added to the deposit at the maturity of each term, or credited to a nominated bank account.
Factors that might affect whether you receive the fixed-interest rate you signed up for are:
- Withdrawing money during the term
- Closing the account during the term
If you withdraw a part or all of the term deposit before maturity, interest will be reduced on the amount you withdraw.
Most banks insist that you provide a notice period to withdraw some or all of your term deposit before maturity. Doing so may incur a prepayment interest adjustment and administration fee.
What interest payment should I choose?
Your choice of interest payment will be narrowed down by the term deposit you sign up for. For example, interest paid annually is only available for terms of greater than 12 months. (As mentioned earlier, interest paid daily is not an option, even though interest is calculated daily.)
Keep in mind, the frequency of interest payment will impact your fixed rate. If you want to earn the most interest possible during the term, it’s usually best to stick to getting paid at maturity.
A term deposit is an investment where your deposit generates an income. So if you wanted to access the interest for spending, or to pay bills, you always have that choice too.