When considering a term deposit, it's important to keep an eye out for several key features that can impact your investment. Here are some of the main features to look for in a term deposit:
Term deposit interest rates
One of the primary features to prioritise when evaluating term deposits is the fixed interest rate offered. The interest rate plays a crucial role in determining the overall earnings you will receive on your deposit throughout the fixed term. As a rule of thumb, higher interest rates tend to result in a greater rate of return on your investment. Therefore, it is essential to ensure that you secure the best possible interest rate that aligns with your specific financial circumstances.
You’ll also want to consider the term, which is the length of time that your funds will be locked away. Term deposits are usually broken up into two categories: short-term and long-term deposits.
Common short-term deposit options include 30 days, 60 days, 90 days, 120 days, 180 days, and 12 months. If you don’t want to tie up your funds for a long time, a short-term deposit could be a relatively safe and practical option for parking your money.
However, longer terms typically offer higher interest rates, but this can vary among financial institutions. If you’re looking for a low-risk investment option for a few years, a three-year term deposit might be worth considering. Beyond providing stable returns, it's likely to yield more than a traditional savings account.
In addition to the interest rate, it’s also important to evaluate whether you would need access to the funds in the near future or if you can commit to a longer lock-in period to potentially earn more interest. Keep in mind that your financial institution could impose penalties for withdrawing funds before the end of the scheduled term.
Interest payment frequency
You may want to look at how frequently you’ll be paid interest. Term deposit providers may pay interest on the following terms:
- At maturity (the end of the term)
When considering opening a term deposit account, it's important to be aware that term deposit providers often have specific minimum deposit requirements. These requirements indicate the minimum amount of money you need to invest in order to open a term deposit with them. Additionally, providers typically offer tiered interest rates based on different minimum deposit sizes.
For instance, let's say a provider has a minimum deposit requirement of $5,000. If you invest this minimum amount, you may be eligible for a certain interest rate. However, if you have a larger sum to invest, such as $250,000, the provider might offer, or you may be able to negotiate, a higher interest rate for a larger deposit. In other words, the interest rate tends to increase as the minimum deposit size grows.
Understanding the tiered interest rates based on minimum deposit sizes can help you make an informed decision when selecting a term deposit provider. If you have a specific deposit amount in mind, it's important to compare offerings from different providers to find the one that offers the most competitive interest rate for that deposit size.
It’s also worth thinking about rollover terms before committing to a term deposit. These are the options available to you at the end of your term, when you’re able to reclaim your deposit and interest earnings. Some providers will require a certain number of days' notice if you're planning on withdrawing your funds and closing your term deposit account.
Some term deposits will allow you to immediately reinvest your savings into a new term deposit and earn even more interest. If you do decide to reinvest right away, it’s important that you reconsider what the current interest rate is as it may have changed since you first opened your account.
You may have the option to have this interest paid into a bank account of your choice, to supplement your household income, or even put towards your home loan or outstanding credit card debt.
Fees and charges
In most cases, term deposits are free from ongoing fees. However, it's essential to be cautious as certain financial institutions could apply charges for actions such as account opening, early withdrawal of funds, or administrative tasks. Look for term deposits that minimise fees to maximize your returns.
In Australia, the government guarantee offers protection on deposits up to $250,000 per ADI. Be aware that, in some circumstances, multiple subsidiary banks are covered under a single ADI. This could mean that, even though you might not have deposits exceeding the goverment guarantee with any one institution, you could be over the limit in terms of aggregate ADI protection.