What Is a Term Deposit?

At some point, most of us will want to save up for a big purchase such as a car, a house deposit or an overseas holiday. Think of a term deposit as a place to stash your cash — and earn interest at the same time — to help you save and reach your financial goals.

What is a ‘fixed term deposit’?

A term deposit — sometimes called a fixed term deposit — is an account that locks away a sum of money for a set time period, usually between one month and five years, to earn interest at an agreed-upon rate.

Term deposits are referred to as ‘fixed’ because they earn interest with a fixed rate, which means the rate will stay the same throughout the term. So, even if market interest rates change and variable rates increase, your rate won’t. Conversely, if rates fall, your money will still earn the rate you signed up for.

» MORE: Fixed vs. variable interest rates

How do term deposits work?

To open a term deposit account, you’ll usually need a minimum of $1,000. This principal deposit, which can’t be topped up until the end of the term, will sit securely and earn that fixed rate of interest you agreed to at signup. Once it reaches maturity, you can withdraw your funds, let the principal and added interest roll over into a new term, or some combination of both.

The catch is that you can’t access your money before the term ends without being slapped with early withdrawal fees, so you shouldn’t use a term deposit as an emergency fund. If you expect to need your cash before the term ends, a more accessible form of savings may be better for you.

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Are term deposits a good idea?

If you like to play it safe when investing your hard-earned cash, then a term deposit is a good savings option. Term deposits are considered one of the most secure places to park some money because your principal is guaranteed, and your investment has certain protections.

There are, however, pros and cons.

Pros of term deposits

Term deposits are generally free to set up and charge few, if any, additional fees.
Term deposits aren’t exactly a set-and-forget option, but they aren’t a lot of work to maintain, either. They only require a little input from you beyond deciding what you want to do with your money before the term ends.
A term deposit can help you keep your savings on track, especially if you fail to reach goals because you keep dipping into your funds. You’ll think twice before touching your savings in a term deposit because you have to pay a penalty for early withdrawal.
Term deposits currently offer the best rates in years. And, if economic predictions are correct, they’ll continue heading upward for the next few months.
Your investment is protected from market downturns because term deposits earn an interest rate that won’t change even if the market does.
Term deposits are protected by the government’s Financial Claims Scheme, which means you could get your money back up to $250,000 in the unlikely event that your financial institution goes bust.

Cons of term deposits

Although a penalty can be a helpful deterrent from dipping into your savings, it’s still a penalty. You’ll need to pay if you want to access your funds before the end of the term, and some banks even impose an interest rate reduction.
A fixed interest rate means that you won’t benefit from an interest rate rise should one occur during the term of your account.
You can only add new funds to a term deposit until it matures, so you’d need to find another option for additional savings.
You must be sure you can afford to lock away the money in your account for the entire term, so you’ll need to budget accordingly.

» MORE: 7 money management skills to master ASAP

Term deposit accounts vs other types of savings accounts

With current interest rates more favourable for savers than in recent years, you may be considering signing up for a term deposit — but before you do, you should weigh your options. A regular savings account that offers a generous interest rate may suit you better, so here’s what you need to know first.

Is your goal to save for the long term or short term? A term deposit may offer more certainty and peace of mind if it’s long term. If it’s short term, a high-interest savings account will provide flexibility as you can make regular deposits and access the funds anytime. Just make sure to compare interest rates because the flexibility of a savings account may be less valuable if a term deposit offers a much higher interest rate.

On the other hand, if you’re after a low-risk investment where your money is locked away safely, then a term deposit is the way to go. Even if the market dips, your rate remains the same, and in most cases, the longer you keep it locked in, the better the rate of return. That’s not the case with regular savings accounts, which align with the cash rate. Some savings accounts offer a bonus rate above the standard variable rate, but you’ll usually need to follow specific rules to earn the added interest.

How to compare term deposits

Evaluate your options before you try to find the best term deposit available. Comparison calculators are a quick and easy way to compare products based on your financial requirements and circumstances.

Here’s what else to look for:

Term length

How long is the term? Is it a short-term deposit (from a few days to 12 months) or a long-term deposit (from one to five years)? Consider your goals and whether you may need to access the funds for fast cash before agreeing to a term.

Interest

What interest rate will I earn? Check the rate that applies to the length of the term you’re interested in.

How is interest paid? Is it paid into your account monthly, quarterly, twice a year or annually? Accounts with frequent interest payments may offer lower rates than those that pay annually or at maturity.

How is the interest calculated and added to your principal deposit? The account could offer simple interest, where only the principal deposit earns interest, or compound interest, where you earn interest on top of the interest you make. It’s uncommon for term deposits to come with compound interest.

Fees and account access

What is the minimum deposit you’ll need? This is typically anything from $1,000 to $5,000.

Are there any setup or account fees?

Can you make early withdrawals? What notice period and penalties apply?

Options at maturity

What happens when a term deposit matures? And, before the end of the term, how much notice will you receive before you need to take action?

If you don’t take action, is there an automatic rollover feature that reinvests your principal and interest into a new term deposit? How easily can you opt-out?

If the deposit rolls over, will you get the chance to make any adjustments — like adding or withdrawing funds? Some banks offer customers a short window, typically up to seven days, to modify the term after the account is automatically rolled over.

Guarantees

Is the financial institution covered under the Australian Government Financial Claims Scheme, which reimburses account holders up to $250,000 if the bank goes bust?

How to open a term deposit

To open a term deposit, you’ll need:

Proof of identity, such as your driver’s licence and Medicare card
Your tax file number
Details of the bank account your funds will be transferred from.

Most financial institutions provide the option of opening a term deposit online using electronic verification for people 18 or over. Once set up, you can transfer your money.

No, not until the account matures. Term deposits are all about locking in a sum of money for a specific period, and you earn interest only on your initial deposit. If you prefer to make regular deposits to top up your account, a savings account may be a better choice, as most allow you to easily withdraw or deposit funds as needed.

The interest earned on a term deposit is considered income, so you’ll need to include this in your tax return for the financial year it was paid. If the amount you’re investing is substantial, it pays to have a chat with your accountant or a financial adviser about your tax situation.

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