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Published November 29, 2022
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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.

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Term deposits are investment products that do exactly what it says on the label. When you invest in a term deposit, you’re choosing to leave your money with a financial institution for a certain period of time. In return, the bank guarantees to give back the principal amount you invest and, in most cases, a set amount of interest over the term you select — usually between 30 days and five years. 

Term deposits sit on the lower end of the risk scale. But like any investment, term deposits may not be a good fit for all investors or the best way to save for every goal. Understanding how they work, their benefits, and how they might fit into your financial plan can help you evaluate if they’re worth including in your portfolio.

Term deposits vs. GICs

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

In Canada, many financial institutions use the name “GIC” rather than “term deposit” to refer to investments that offer a guaranteed interest rate in return for lending your money to the financial institution for a specific period. In some cases, banks may use “term deposits” to refer to shorter-term secured investments, with terms of up to 365 days and “GICs” for those with terms of one to five years.

You typically can’t withdraw your money for both products until the end of the term, or you may face a penalty.

Benefits of term deposits

Fixed-rate investment

Many term deposits offer fixed rates of interest over a set term. This fixed-rate investment can give some investors peace of mind when saving for a specific goal or during market volatility. 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.

Interest rates on term deposits are generally higher when you agree to a longer term. For example, interest rates on a 180-day term deposit are typically lower than rates you’d receive if you invest your money in a five-year term.

Wide variety

Term deposits are available with flexible terms of up to five years. They offer different interest rates and can be cashable or non-redeemable during the term. You can also hold term deposits in registered plans such as tax-free savings accounts or registered retirement savings plans. These options let you customize your term deposit to match your goals. 

In addition to fixed-rate options, some financial institutions offer:

  • Index- or equity-linked term deposits, whose returns are linked to stock market performance or a particular basket of stocks.
  • Escalating term deposits, whose rates increase with every year that you continue to hold the term deposit.
  • Term deposits in U.S. dollars and other currencies.

Safe investments backed by the CDIC or provincial organizations

Term deposits qualify for coverage by the Canada Deposit Insurance Corporation (CDIC) for amounts 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.

Low minimum deposit

Most term deposits require a minimum deposit as low as a few hundred dollars.

Aimed at 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. Most term deposits have either short terms of 30 to 270 days or longer terms of one to five years.

Term deposits come with various options for interest payment intervals. For example, interest may be paid monthly, semi-annually, annually or at maturity. Some term deposits may also be cashable, which allows you to access savings after the first month. Others offer early-redemption options that allow you to withdraw your principal before maturity, although your interest earnings will be affected.

Lower risk than some other investments

Most term deposits offer a guaranteed rate of interest for your term and protect your principal investment amount, so they aren’t subject to market ups and downs like stocks and other investments. However, taking on this lower risk means you won’t benefit from any market gains.

The exception is if you choose an index- or equity-linked term deposit, which is tied to the performance of a stock market index or a basket of stocks. While your principal will be guaranteed, your rate of return will not be.

Frequently asked questions about term deposits

What’s the difference between a term deposit and a GIC?

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 five years 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 to refer to shorter-term fixed-interest products (up to 365 days).

Are term deposits worth it?

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.


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