4 reasons why term deposits are still worth using

4 reasons why term deposits are still worth using

Aussie savers have taken a beating this year, with three cuts to the Reserve Bank of Australia’s cash rate bringing interest rates down to the lowest point on record.

Term deposits have had a particularly bad go of it in 2020, with the average 12-month term deposit with a balance of $20,000 falling from 1.40 per cent on April 1st to 0.63 per cent on December 14th.

However, term deposits are not to be scoffed at. There are still some valid reasons why term deposits are worth using as we move into 2021.

1. Term deposit providers have hiked rates

It’s not all doom and gloom in the world of term deposit interest rates.

In fact, there are some providers who’ve bucked the trend and increased interest rates since the last RBA cash rate cut in November.

AMP Bank increased multiple term deposit accounts by between 15 and 20 basis points following the cut. Challenger bank, Judo Bank, also lifted interest rates on a number of term deposits by up to 9 basis points.

Term deposit provider Rate increase range Date of increase
AMP Bank 0.15% - 0.20% 09/11/2020
ING 0.20% 11/11/2020
Bank of Us 0.05% - 0.15% 18/11/2020
MyState Bank 0.15% 01/12/2020
Citi 0.10% - 0.15% 07/12/2020
Judo Bank 0.01% - 0.09% 09/12/2020

Source: RateCity.com.au. Data accurate as of 15/12/2020.

Note: Rate hikes for a range of term deposit terms and interest payment frequencies. For a full list of every term deposit hike, please contact RateCity for more information.

If you’d given up on seeing rates rise on deposit accounts for some time, keep in mind that providers are still fighting to make term deposits competitive for Aussie savers.

2. Savings account rates get cut out-of-cycle

One of the biggest benefits of using a term deposit to store your money is that your interest rate is locked away for a set period of time. Even if the RBA cut the cash rate every month for the duration of your term deposit, your rate would not budge.

Comparatively, savings account rates are not only subject to the whims of variable interest rates in the market, but providers cutting rates out-of-cycle. This is, unfortunately, a common occurrence.

RateCity research found that in the months between cash rate cuts this year – April to the end of October – 92 providers cut interest rates out-of-cycle with the RBA. In fact, only last week we saw Australia’s biggest bank – CBA – cut savings rates for a second time, right before Christmas.

It’s challenging to say when the RBA will lift the cash rate again. But it is still potentially likely that your provider may cut your savings account interest rate due to the frequency of out-of-cycle rate cuts this year. However, if you’ve locked in a term deposit rate, your interest will stay unchanged for that period of time.

3. Backed by the government guarantee

Unlike other investment options, term deposits are supported by the Financial Claims Scheme, also known as the government guarantee. Meaning, that deposit-holders with authorised deposit-taking institutions (ADIs) are backed up to the value of $250,000 per account holder per ADI, in the event the provider were to go under.

Other investment options, such as shares, EFTs, investment bonds and even the property market (outside of your home loan) are not backed by this guarantee. There is a greater level of risk involved when investing your money in other areas.

In a time of relative uncertainty, you may be looking for a more stable investment option. While your return may not be as high, your nest egg is at least protected in the event things go belly up – up to the value of $250,000.

4. Term deposits help ease financial uncertainty

If this year has taught us anything it’s that we cannot predict the future. And this is where term deposits really shine, as they offer a level of financial certainty other savings or investment options cannot.

Although RBA Governor, Philip Lowe, stated “the board is not contemplating a further reduction in interest rates,” 2020 has shown that there’s no guarantee that interest rates won’t fall further. Whether cut by the RBA or reduced out-of-cycle by your provider.

Many financial experts have recommended Aussies seriously consider the benefits of fixing interest rates right now - particularly for home loans.

In response to the question ‘should I fix my home loan rate’, Financial Adviser, Paul Clitheroe, stated he had “argued against fixing home loan rates for nearly 40 years” but now “it is hard to see how you could seriously disadvantage yourself” by fixing your home loan rate.

But does this same logic apply to your savings account? It all depends on whether you believe that interest rates could fall further.

As a term deposit locks in your interest rate for a set period of time, you know exactly how much interest you will be earning over that time frame. If you’re looking for a savings or investment option with relatively low risk – a term deposit may suit your financial needs.

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Fact Checked -

This article was reviewed by Senior Journalist Tony Ibrahim before it was published as part of RateCity's Fact Check process.

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Learn more about term deposits

How often do term deposit rates change?

One of the advantages of a term deposit is that this type of investment enjoys a fixed interest rate. This means that the interest rate that you have signed up for will not change during the period of your term deposit, regardless of rising or falling market interest rates.

However, it is important to be aware of the end of your term deposit. Once your term ends, whether this is in three months or three years, many banks will default to rolling over your deposit into a new term, sometimes with a lower interest rate. Once your term deposit rolls over, you will then be locked into this new fixed interest rate for another term.

Make sure to use the grace period at the end of your term to your advantage. Shop around for a competitive interest rate and reinvest your money accordingly.

Will term deposit rates increase?

While there’s no definite way to predict when term deposit rates will increase, it may help to understand some of the factors that influence term deposit interest rates.

The official cash rate is set by the Reserve Bank of Australia (RBA). When the RBA either increases or cuts interest rates, it influences the interest rates set by banks.

The other factor that determines when term deposit rates will rise is competition between banks. Banks may increase their term deposit rates or offer higher rates as an incentive to win new customers over or increase their market share.

Term deposit interest rates will also change, depending on how much you invest and how long you invest.

What is the best interest rate for a fixed term deposit?

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:

  1. The size of your deposit
  2. The duration of the term
  3. 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 paid at maturity, might receive a fixed interest rate of 2.20 per cent.
  • A $10,000 fixed term deposit taken out over 12 months, with interest paid quarterly, might receive a fixed interest rate of 2.00 per cent.

Using the size of your deposit, the duration of the term and how often you want to be paid interest, you can shop around for the best interest rate for a fixed term deposit.

Which bank has the best term deposit rates?

If you’ve been shopping around for a term deposit, you might be wondering which bank has the best term deposit rates.

Term deposit rates will generally be affected by the amount you choose to deposit and whether you opt for a short or long term deposit.

Longer term deposits tend to have higher interest rates than shorter terms. The trade-off for earning a higher interest rate on your term deposit is that you can’t access your funds for the duration of the term deposit.

When comparing which bank has the best term deposit rates, it pays to do your research and compare how your funds will fare over the short and long term.

Unlike home loans or savings accounts which give you the option of fixed or variable rates, term deposits are always fixed, which means you get a guaranteed amount of interest over the term of the deposit.

What is a term deposit?

A term deposit is an investment savings account. A term deposit usually pays a higher rate of interest than a regular savings account, with the interest rate fixed for the term (or duration) of the deposit.

You can open a term deposit account for one month or up to five years depending on your investment goal, and invest as little as $500 to start earning a profit.

With a term deposit, you get to decide how much you want to invest (the principal or deposit), for how long (the term or duration) and the frequency of interest payments.

A term deposit represents a secure form of investment, unlike trading in shares or purchasing real estate. And a term deposit up to $250,000 is protected by the government guarantee.

What is a term deposit rate?

The term deposit rate is the agreed interest rate for your term deposit. It remains fixed for the term of the deposit.

For example, if you deposit $5,000 for 12 months at a 2.5 per cent term deposit rate, that 2.5 per cent term deposit rate will be fixed for the entire 12 months and won’t change until the term matures.

The term deposit rate is one of the most important factors to consider when comparing your term deposit options. The general rule of thumb is that the longer the term, the higher the term deposit rate.

Term deposits are a popular type of investment because they’re safe and provide reliable returns.

The return you get on your term deposit will be determined by the amount you initially invest, the amount of time you choose to invest it for, and the term deposit rate.

What are ME Bank’s term deposit interest rates for businesses?

ME Bank offers a variety of rates for business term deposits, depending on the amount of time you choose. You won’t have to pay any set-up or account-keeping fees for your business deposit. You can invest as little as $5,000 or as much as $2 million with a term duration between one and 60 months. 

The ME business term deposit rate is determined based on the term and when you wish to receive interest payments. 

While rates are set by the lender, you should always check with ME Bank to find out what the term deposit rates are, and which are applicable to your situation. 

How safe is a term deposit?

You may have heard that a term deposit is a type of investment, different to a traditional savings account. All investment comes with inherent risk, so it’s important to know how safe a term deposit is before committing.

Term deposits offer a fixed interest rate which is guaranteed, so you do not have to worry about rising or falling interest rates when investing. You can add up how much interest you will earn over your fixed term, and this will be paid into your account per the conditions of your term deposit.

Term deposits with authorised deposit-taking institutions are also guaranteed for up to $250,000 by the Financial Claims Scheme, so you don’t have to worry about the bank collapsing either.

The only inherent risk of a term deposit is if you may need to break it early. If this happens, you will need to pay a breakage fee and possibly sacrifice some of your interest as a penalty. But if you know you can invest a certain amount of money for a fixed period of time, you can rest assured that a term deposit is a safe investment option.

What are Bendigo Bank’s business term deposit rates?

Bendigo Bank offers businesses two types of term deposits - Standard and Gold. You can open a Standard term deposit by investing at least the specified minimum amount for a flexible investment period ranging up to five years. A Gold term deposit requires a larger minimum investment over a fixed term, which is currently one year.

However, you can’t add funds to a Standard term deposit after the first seven days, and any withdrawals before the review date need to be done on request. If you’ve opened a Gold term deposit, you can add more funds over the year, but withdrawals may be restricted just as with a standard term deposit.

A Standard term deposit’s interest rate depends on the amount deposited, the frequency of compounding interest, and the deposit term. Further, this interest rate may apply irrespective of how often interest is compounded. On the other hand, Gold term deposits usually offer a flat interest rate no matter how large or small the deposit, with the interest likely compounded every quarter. 

To find out about Bendigo Bank’s current business term deposit rates, visit the banks’ website.

How do you calculate term deposit interest?

If you’re ready to open a term deposit, there’s a lot you’ve already figured out. You’ve decided on the length of your term and found the best interest rate, but there’s something you still might be wondering. How do you calculate term deposit interest?

One of the easiest ways to calculate term deposit interest is by using a term deposits calculator. However, you can also estimate your total earnings on your own.

A fixed interest rate signifies what percentage of your original balance your term deposit will earn annually. For example, a deposit of $1,000 at an interest rate of 3 per cent will earn three per cent of $1,000 annually – meaning you’ll earn $30 of interest each year.

You can estimate your interest using three variables. Multiply together your deposit amount, interest rate, and term length and you’ll approximate the interest a deposit will earn. For example, if you invest in a term deposit for $5,000 at an interest rate of 3 per cent for two years, your interest would total $300.

What should I know about ING’s business term deposit rates?

ING Direct offers several term deposit options for businesses looking to save over some time. 

The business term deposit rates ING offers are compounded annually, meaning that the interest earned after the first year is added to the amount you originally deposited. 

During the second year, the interest is calculated on the new amount. If you close the term deposit once it matures, you can ask for the money to be transferred to your business account either with ING or another bank. You can also renew the term deposit and choose to reinvest the total amount earned through the earlier term deposit. Alternatively, you can opt to renew with just the sum you originally deposited, and withdraw the interest earned.

You’ll need to deposit a minimum of $10,000 for at least 90 days if you open a term deposit with ING. In the current low-interest environment*, the annualised interest rate for a 90-day deposit is 0.05 per cent. This means you’d earn $1.25 over a three-month term if you deposit $10,000. 

If you opted for a longer time frame, such as two years, you’d get an annualised interest rate of 0.30 per cent on your deposit. If you deposited $10,000, in two years the interest accrued would amount to approximately $60. Again, this is an estimate only based on current rates.

* Rates correct as of January 2021

What are the current AMP Bank business term deposit rates?

Term deposit interest rates are subject to frequent market change. To view the most current AMP Bank business term deposit rates, it’s best to view the provider’s website directly

If you want to earn competitive rates on your fixed deposits for an amount between $100,000 and $500,000, AMP Bank deposit may worth considering. Term deposits with AMP Bank allow you to earn reliable returns for different tenures between one month and five years.

You can also choose when you want to receive the interest; monthly, quarterly, or half-yearly. If you wait until maturity, you’ll earn the full interest.

AMP Bank term deposits do not charge monthly maintenance fees. If you’re at least 13 years and an Australian citizen with a local address, you’re eligible for AMP Bank term deposit.

Can I negotiate a fixed term deposit rate with the bank?

“Can I negotiate a fixed term deposit rate with the bank?” you may be wondering.

Many banks welcome negotiation when it comes to term deposit rates, especially with deposits of over $100,000. Even if your deposit is lower than $100,000, it may be worth a discussion with your bank.

Negotiating with your bank could secure you a higher fixed rate, which will earn you extra interest over your term. You may also discover bonuses or special offers you can acquire through your bank.

Securing the highest interest rate possible is the key to making the most of your term deposit. You may have compared deposits online or discussed your options with a financial adviser, but you also might be wondering about negotiation in order to get a better rate.

What is a term deposit account in a bank?

A term deposit account in a bank is a type of investment where you lock away a portion of your savings for a fixed period in return for earning a set amount of interest.

Opening a term deposit account in a bank is a safe way to earn a stable return on your investment of cash.

Term deposit accounts can be a good way to give your savings an extra boost without the need to actively watch or manage your funds during the term of the deposit.

Term deposit accounts in a bank are a popular type of investment because they’re safe and there’s very little risk that you could lose your money.

If you make a term deposit of up to $250,000 with an authorised deposit-taking institution, it’s guaranteed by the Australian government, which means there’s virtually no risk of losing your money and you’re guaranteed return.

Interest rates vary depending on the length of the term, the amount you deposit and the bank you choose.