A term deposit account is an account where the investor / depositor agrees to a fixed term and interest rate for locking their money away in an account.
The history behind the term deposit is that the bank offers a higher interest rate and return to the depositor when there is certainty over the length of time that the bank can have access to the depositor's money to re-lend to other borrowers (and therefore make a profit). The bank rewards the secured term from the depositor with a higher interest paid to the depositor.
Term deposit accounts are a 'fixed return' option to compare against high interest savings accounts, however high interest savings accounts now feature very comparable interest rates to those offered on term deposits (historically term deposits offered far higher rates of interest than a traditional savings account). The key difference is that the interest rates on savings accounts are variable.
A term deposit is an account where you deposit your money and at the time of deposit, you know in advance how much you will be paid in interest, and when you'll be paid. When selecting your term deposit, you will see different rates of interest available from the bank / institution for different terms. As an investment vehicle, term deposits are easy to establish and quick to get started, unlike an investment in property or the stock market which both have significant lead time.
Interest Rates and Payments
Term deposits typically feature a fixed interest rate, as opposed to the variable rates of interest offered on high interest savings accounts which move up and down in response to official interest rate rises. A fixed interest rate means that you get a fixed return on your investment, regardless of whatever happens with interest rates and the economy. This means that there is more certainty and security in a term deposit compared to a savings account, and less volatility than other investments in assets like property, commercial property or the stockmarket.
For terms shorter than one year, your interest will be paid at maturity of the term deposit. This means that for a 6 month term deposit, you will be paid your interest payment at a date 6 months after your deposit, as well having access to the original deposit amount at this date. This short term deposit is not advantageous if you rely on a regular monthly income stream.
For term deposit terms longer than one year, you will have an option of when you you would like to receive interest, from monthly options for interest payments to semi annually.
The following options apply for payments of term deposits.
Less than one year:
Maturity - your interest is paid at the end of the term deposit period.
Longer than one year:
Maturity - your interest is paid at the end of the term deposit period.
-or-
Annually: your interest is paid at the end of 12 month period
Semi-annually: your interest is paid every six months
Quarterly: your interest is paid every three months
The payment frequency differs between term deposit providers so be sure to pick an interest payment time frame that suits your requirement for income.
Term Deposit Terms & You
Both the banks and depositors view term deposit lengths in the same way.
- Short-term term deposits: one month deposit through to six month deposits.
- Long-term: term deposits over 12 months in length and up to 5 years, and in some instances up to 7 years.
We compare the following term deposit options:
- 1 Month
- 2 Months
- 3 Months
- 6 Months
- 9 Months
- 12 Months
- 2 Years
- 3 Years
- 4 Years
- 5 Years
Features & Benefits of Term Deposits
One of the great benefits of the term deposits is that the bank / provider is paying you for access to your money, so there are usually no establishment fees or ongoing account fees.
However, there is always a catch with any financial product and the catch is that if you break the term and leave early, there will be a penalty. If you need to get your money out early, you will be charged either a penalty fee or awarded only a reduced interest rate for the period instead of the interest rate agreed to at the initiation of the term deposit. This will differ between institutions, so check the terms and conditions carefully. The key to a successful term deposit is to be comfortable with the term that you are committing to.
Use of Multiple Institutions
To access term deposit accounts, many providers don't require you to have an account with that institution as you can nominate an existing account to have your interest and balance paid into at maturity.
Automatic Rollover
At the conclusion of your term deposit, your term deposit provider can automatically roll over your matured deposit to a new term deposit of the same period as your original, at the new interest rate offered for that new term.
Compound Interest on Some Accounts
Some term deposit accounts offer monthly payments into the same account with the benefit of compound interest on that amount and the balance, rather than a fixed interest amount. This is only available to accounts over at least one year in length as monthly interest payments are not available on terms shorter than one year.