Term Deposits: What They Are and How They Work

Term deposits are low-risk investments that guarantee the return of your principal plus interest when you agree to lock up the funds for a set amount of time.

Happy dad and little tween boy sit at the table hug hold piggy bank look at the distance dream of their growing term deposits.

Term deposits offer predictable returns and peace of mind — ideal for those new to investing in Canada.

Understanding how term deposits work, their benefits, and how they might fit into your financial plan can help you decide if they’re worth including in your portfolio.

What is a term deposit?

When you invest in a term deposit, you agree to leave your money with a financial institution for a specified period. In return, the bank guarantees to repay the principal amount you invest, often with a set amount of interest over the term you select — usually ranging from 30 days to over a year.

Term deposits vs. GICs

Term deposits are in the same asset class as — and very similar to — guaranteed investment certificates, or GICs. The difference lies mainly in the terminology banks and credit unions use.

Many Canadian financial institutions use the name “GIC” rather than “term deposit” when referring to low-risk, secured investments.

However, some banks label shorter-term investments, those with terms of up to 365 days — as “term deposits,” and terms longer than one year as “GICs.”

You typically can’t withdraw money from either product until the end of the term, or you may face a penalty.

How does the interest work on term deposits?

The fixed rate of interest on term deposits is usually represented in an annual percentage yield (APY). However, the interest may be calculated daily and paid monthly, semi-annually, annually or at maturity.

The key factors that determine the rate of return on your investment include:

Financial institution: Interest rates vary by financial institution. Online banks typically offer more competitive rates.
Investment amount: Some institutions offer tiered interest rates based on your initial deposit. The larger your investment, the higher the interest rate you may receive.
Length of term: Market conditions and the duration of the term you select can influence your return. In a rising interest rate environment, banks generally offer higher rates for longer-term investments.
Type of interest: You can choose between fixed, variable or market-linked term deposits. Certain interest rate options tied to external market factors may impact your overall returns.
Redeemability and interest payment frequency: Some term deposits allow early access to your funds, but this flexibility usually comes at a cost. Cashable investments tend to earn a lower interest rate compared to the compounding non-redeemable options. Similarly, opting for monthly or semi-annual interest payments will typically yield lower returns than annual or at-maturity payments.

Make sure you factor in your investment goals and personal preferences before finalizing the terms of your investment.

Where and how to get a term deposit

You can buy a term deposit with your current bank or a new financial institution offering better rates and options to suit your financial plan.

If you’re an existing customer of a bank, you can buy a new term deposit online. If you’re new, depending on the institution, you may still be able to open an account online or visit a brick-and-mortar location. You may need to provide:

Your personal information, including your email.
Two pieces of valid government-issued IDs, such as your driver’s licence and passport.
Your Social Insurance Number (SIN).

Note that international students have different qualifying requirements under the Student Direct Stream (SDS) program.

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Why invest in a term deposit?

Low minimum deposit

Most term deposits require a minimum deposit as low as a few hundred dollars, offering a low barrier to entry for those exploring the Canadian investment market.

Predictable investment

Fixed-rate term deposits are predictable investments in that not only will you get your principal investment amount back, but you’ll also be able to count on a specific rate of return at the end of the term. If you value peace of mind and want to avoid market uncertainty, these short-term investments may be a good place to start.

Wide variety

Term deposits are available with a variety of terms and interest rates. You can customize your term deposit to match your goals, risk tolerance and tax situation. Options include:

Choosing cashable term deposits over non-redeemable terms for ready access to funds in case of emergencies.
Holding term deposits in registered plans such as tax-free savings accounts, for tax-free withdrawals or registered retirement savings plans, for tax-deferred growth.

In addition to fixed-rate options, you can choose:

To opt for Index- or equity-linked term deposits, whose returns are linked to stock market performance. That way, you can secure your principal and take advantage of the market performance.
To invest in escalating term deposits, whose rates increase with every year that you continue to benefit from in a rising interest rate market.
To hold term deposits in U.S. dollars and other currencies can help you diversify your portfolios and interest returns.

Protected by deposit insurance

Term deposits purchased through most banks qualify for the Canada Deposit Insurance Corporation (CDIC) coverage of up to $100,000. For index- or equity-linked term deposits, the CDIC only insures products that guarantee full repayment of the principal at maturity or otherwise. If you buy your term deposit through a credit union, the principal investment will instead be guaranteed by a provincial credit union deposit guarantee program.

Deposit insurance could help you recover eligible deposits if your financial institution fails, making term deposits one of the safer investment options.

Ideal for short- to medium-term investing goals

Although term deposits can lock up your money for a certain period of time, they are designed for short- to medium-term savings periods. They come with various options for interest payment intervals and redeemability options, allowing you to access savings after the first month. Term deposits can help achieve goals you set for the near future such as, saving for a car purchase, down payment of your house, or wedding.

Note that with early-redemption you can withdraw your principal before maturity, although your interest earnings will be affected.

Alternatives to term deposits

If a term deposit isn’t for you, there are plenty of other options for you to consider, including:

Type	Pros	Cons
GICs	Offer a variety of terms and investment options. Often earn a higher rate of return when interest rates or stock markets are performing well.	Lock your money for the entire term in exchange for the full return. Generally require a minimum deposit.
High interest savings accounts (HISAs)	Earn a high rate of interest to help your money grow. Usually no fees.	Some HISAs require you to keep a minimum account balance. The highest rates are typically only found at online banks.
Online bank accounts	Can be used as a savings and chequing account. Competitive interest rates.	Limited availability in Canada, and typically only offered by online banks. Frequent ATM use could result in many added charges.

There is little to no difference between a term deposit and a GIC. Some financial institutions offer products with both these names — with terms from 30 days to over a year that provide a guaranteed interest rate and the return of your principal investment. Others only use “GIC” instead of “term deposit” to refer to this type of investment. Some banks use “term deposit” for shorter-term products (up to 365 days) and label terms over a year as “GICs.”

Whether or not a term deposit is a good choice for your portfolio depends on your goals. For short- to medium-term savings goals, such as a car purchase or wedding where you need a guaranteed return of your principal investment and some interest earned, a term deposit might be a good option. The guaranteed return could make a term deposit more appealing than other investments that have a risk of a potential loss or decrease in value.