Term deposits let you invest for a set amount of time and get a fixed interest rate. They can be useful when saving for bigger items like a car or investing when you want to be certain about the interest you’ll earn.
If you want to save but might need quick access to your money, a savings account could be better.
How term deposits work
Term deposits are a way to invest your money with an authorised deposit-taking institution (ADI) and earn a fixed rate of interest.
Your money is locked away for the time that you choose (the term), usually between one month and five years. You need a minimum amount to open a term deposit, for example, $5,000.
Advantages of term deposits
Higher interest rates
Term deposits offer a higher interest rate than most transaction and saving accounts. Generally, the more money you put in, or the longer you invest, the higher the interest rate.
Protected by the Australian Government Financial Claims Scheme
The financial claims scheme (FCS) protects deposits made with Australian banks, building societies and credit unions. This guarantees to pay you up to $250,000 to replace deposits in the unlikely event your bank, credit union or building society fails. The safety net only applies to authorised deposit taking institutions regulated by APRA.
No set-up fees
Most term deposits have no set-up or account fees. But if you need your money before the term ends, you generally have to give 31 days’ notice and pay a penalty fee. Check the terms and conditions.
Some providers may pay your interest into a linked transaction account. Check if there are any account fees or ask if they can pay the interest into an account you already have.
Disadvantages of term deposits
Early withdrawal penalties
To earn interest on your term deposit, your money is locked away for a chosen period of time. If you need your money before the term ends, you may have to pay a penalty fee. You may only receive a proportion of the interest earnt, or none at all.
Be wary of term deposit scams
Scammers are offering fake investments advertised to be ‘like a term deposit’ that claims to be a ‘new breed of investment’. Look out for:
- Offers claiming to ‘beat inflation’.
- Interest rates that are higher than other alternatives.
- Guaranteed high returns.
- Someone contacting you ‘out of the blue’ with an offer to invest.
Choosing a term deposit
Compare the features of term deposits
Always shop around for the highest interest rate and best features before you choose a term deposit. Be sure to compare products across different financial institutions. It’s important to check:
|Interest rate||what the interest rate is when interest is paid — monthly, annually or at maturity|
|Time frame||how long you can invest for how interest rates change with different investment time frames|
|Amount invested||how much you need to open a term deposit how the interest rate changes the more you invest|
|Fees||if there are any set-up or account fees how big the penalty fee is if you need your money early|
Using comparison websites
Comparison websites can be useful, but they are businesses and may make money through promoted links. They may not cover all your options.
Scammers can steal your personal details by creating fake comparison websites for term deposits and other financial products. Comparison websites must be authorised and licensed to provide financial product advice for any product discussed on their website. Check the comparison website has a Financial Services Guide.
How to check it’s a term deposit
Term deposits can only be issued by a bank, credit union or building society listed by APRA as an authorised deposit taking institution (ADI). If the ADI is not on APRA’s list, then it’s not a term deposit and it will not be covered by the financial claims scheme.
Some legitimate managed funds can have investment products with the look and feel of a term deposit, but these are much higher risk. Check with the ADI to make sure it’s a term deposit.
What to do when your term deposit matures
If you do nothing, your term deposit may roll over into a new term deposit. There may be a fee to get your money out of the new term deposit. It could also have a lower interest rate than before.
Review your term deposit a month before it matures. Compare it with other products to make sure you’re getting the best deal.
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Source: ASIC MoneySmart