The inside story on how to choose the best term deposit

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Term deposits might come across as a very simple product, but that doesn’t mean you should take a ‘one size fits all’ approach when selecting one. Banks can have dozens of different term deposits, and each one can lead to different interest returns.

One of the biggest differences between term deposits is the length of the term.

What is a term?
The ‘term’ in term deposits is the fixed amount of time your money is deposited with that financial institution. These terms also come with a fixed rate of interest, which as we’ll explain in more detail, vary depending on:

  • the length of the term
  • how often interest is paid (e.g. quarterly, annually, at maturity, etc.)
  • how much you’re depositing
  • whether the interest is compounded or not.

Whatever term you choose, most term deposits require you to lock this money away for the entire time. If you need to access it early, you’ll typically have to wait up to 31 business days and possibly be hit with an exit fee and a reduction in your interest rate.

What terms are available?
Each ADI (authorised deposit-taking institution) that offers term deposits will have different terms on offer. Some will offer only a few, while others will provide a huge variety of options.

Term deposits are generally available in the following terms, from shortest to longest: one month, two months, three months, six months, nine months, one year, two years, three years, four years, five years.

Typically, ‘short-term deposits’ last for less than one year, while anything over a year is classified as a ‘long-term deposit’. It is possible to get term deposits for up to seven years, but these are less common.

You may choose for your interest to be paid at maturity or into your bank account at regular intervals (e.g. monthly, quarterly, semi-annually, annually), but keep in mind most providers have lower rates on term deposits that pay interest regularly.

A small number of term deposits also allow interest to compound if you choose for the interest to be paid at maturity. As at January 2019, only eight providers in Australia offered compounding interest.

Of these, most compound interest annually, although there are some that offer semi-annual, quarterly and monthly compounding options. But does this result in greater returns?

Yes, so long as the interest rate isn’t lower than the non-compounding option.

Some providers will have reduced interest rates on term deposits that allow compounding interest, because a compounding term deposit will earn significantly more interest than a non-compounding term deposit with the same interest rate.

How the different terms affect your interest
Longer term deposits generally offer higher interest rates than shorter ones, although this isn’t always the case. Check some of the smaller institutions and you may find better rates.

Case study: Different term deposit terms
Three separate people have $10,000 to invest in a non-compounding term deposit at the same bank.

Person 1 wants to invest in a short-term term deposit for three months, which gives her an interest rate of 1.8 per cent per annum. She will earn $45.

Person 2 wants to invest in a one-year term deposit, which is offering 2.2 per cent per annum. She will earn $220.

Person 3 has longer-term ambitions and puts her money away for five years at 3.2 per cent per annum. She will earn $1600.

Should you go for a short or long-term deposit?
Short and long-term deposits both have their benefits for different reasons. Long-term deposits obviously provide a much larger sum of interest for the same amount of money, with or without compounding interest. But long-term deposits also require you to not touch this money for the entire term, unless you want to cop a reduced interest rate and a potential break fee. Two to five years is a long time to be without a substantial sum of money, and if you were to ever need it, you’d lose significant interest.

Also, by locking yourself into a long-term deposit, you run the risk of missing out on interest rate rises over that term. For instance, 3.4 per cent per annum may sound good in 2019, but what if in three years’ time the average savings account is paying five per cent per annum and you’re still stuck with 3.4 per cent per annum for another two years? Of course, interest rates could also drop over this time, but banks generally price their term deposit rates based on their in-house economist’s interest rate forecasts.

But having this money locked away long term can also be a blessing. A lot of term deposit users prefer not being able to access the money because it forces them to save. This is different to a savings account where money can be withdrawn at will. Long-term deposits don’t give you the option of losing willpower!

Short-term deposits, on the other hand, generally earn less interest due to the lack of time, but can still be a quick and easy way to earn a decent amount of interest. They can be good for short-term savings goals such as holidays or Christmas presents. You just have to weigh up what you’re investing for, and whether you’re willing to part with the money for a fixed period of time.

When considering how long to lock away your money, ask these questions:

  • Will you be able to go without the money for the full term?
  • Do economists expect interest rates to fall or remain stable over the term?
  • Will you be happy to forgo the potentially higher long-term returns of investing in shares and bonds for less risk?

If you answered no to any of these questions, perhaps you may want to consider a shorter-term deposit or putting your money in another product, such as a bonus savings account. Don’t forget, some bonus savings accounts pay as much interest as some term deposits, are also covered by the ADI government deposit guarantee, earn compounding interest and come with the added convenience of allowing fast easy access to your funds.

William Jolly is a finance journalist, formerly at Canstar and now at savings.com.au. Much of his work is centred on helping to improve the financial literacy of Australians and provide them with resources on how to save more money in their everyday lives.

Do you follow the trends in term deposits? Have you found better rates at the smaller institutions?

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41 Comments

Total Comments: 41
  1. 0
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    Some of those savings accounts have higher interest rates than term deposits.

    • 0
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      What accounts are those OG?

    • 0
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      C’mon Geezy … step up to the plate … put your money where your mouth is …

      If you are going to make these statements … you need to substantiate them with real evidence and facts …

      WAITING …

    • 0
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      Just more bullshit from him.
      Anyway if they did have a higher rate it would be short time only, remember they’re variable rates.

    • 0
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      Yes OG My bank has an account where if you deposit each month and make no withdrawal it pays 3.6% which is higher than the term deposits.

      I’ve been watching the Bond Market inversion. It doesn’t look pretty.

      Over the years it has generally been the bond yields and prices that pick corrections and recessions.

      It’s scary when ten year bonds are yielding minus 0.01%.

      That’s panicking about capital losses.

    • 0
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      That was last years % so I was wrong. It’s less now but I haven’t checked as I stopped depositing. Not much point really at current rates.

  2. 0
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    The interest rates on Term deposits AND bank accounts are atrocious —
    They try to get you to use a progress saver — maybe can get 2.8% there BUT have to put more in every month or whatever AND you lose ALL interest IF you draw ANY money out — so if you have saved for quite a long time it is the BANK that gets the biggest benefit — as they keep the interest –these accounts are a total rip off –and are a bloody disgrace.

    • 0
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      Plan B – see my post on ING. 2.8% is the highest constant return these days. If you have your pension deposited into your Everyday Orange account, make 5 transactions a month, you earn a bonus interest which takes it up to that %. You don’t lose your interest – you’re interest accumulates at a daily rate and you’re paid for the amount invested in your 2nd account – your retirement account It’s not difficult, there are no bank fees nor withdrawal fees. I use it regularly and keep enough cash in my Everyday account to enable the 5 monthly transactions. Buy something for about 85c to $1 each time.

      Another little earner is to get a Coles Mastercard Flybuys account. set up a flybuys card account (which costs nothing), and use the Coles Mastercard for everything you buy – you earn 2 Flybuys points for every dollar you spend. It mounts up really quickly and the $99 annual fee is paid for very early in the first part of the year. You can convert your Flybuys points into Flybuys dollars and there are many retail outlets which are part of the Coles Myer Group. It’s the best loyalty programme around. Coles also offers very lucrative weekly specials for flybuys members, like 10c a litre off your petrol purchases, AND you accumulate flybuys points.

    • 0
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      Westie, I concur. We put everything on the Coles MasterCard and the flybuys cover movie tickets, $20 off a Target shop, etc. We feel it is worthwhile and you can see your purchases clearly and you pay it each month so as not to accrue any interest. It works for us too. If you don’t have a lot of money then get creative. We also buy half price whether we have run out of a product or not and most things circle back around to half price between five and eight weeks.

    • 0
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      Westie I will look into that, thanks

  3. 0
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    Written for the mentally challenged? What actually have you told anybody? Most people know all of that as its elementary isn’t it.

    • 0
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      Are you boasting or complaining MICK?!!! You can always learn something new, even if you believe you have all the information at your finger tips. I find these posts really helpful, and enjoy learning what other posters are doing to stretch their budgets further. I don’t believe any of us on this post are mentally challenged or we wouldn’t be here, would we? Most people I’ve talked to DON’T have any idea about the Coles MC and the link to Flybuys, and I’ve been able to help them with my experience.

      Paddington has the right idea – use your MC for everything you buy, where possible, and pay the amount due at the due date – no interest incurred then. Just out of curiosity MICK – do you have a Coles MC linked to Flybuys?

  4. 0
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    Another negative post from Old Geezer. with out any facts.

  5. 0
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    All common sense stuff really! I find online savings accounts give me a better rate of return than term deposits, plus the money is at call.

  6. 0
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    Term deposits should be at least at the deeming rate which they used to be. A few years ago even above. Do not have enough any more to bother with terms and I let the money just lie in the account. Pay everything off in advance as all your finances are deemed anyway. Funny if you have $10’000 in a biscuit tin it is worth more than a term deposit. An extra $30 in your fortnightly pension (for deemed pensioners). What a ridiculous situation that is!

    • 0
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      Yes, Cowboy and the deeming rate is 3.5% —
      GOOD LUCK GETTING ANYWHERE NEAR THAT — by this *&^%$_# Government are STILL deeming you to be getting it

    • 0
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      Hi Cowboy Jim. Was interested in your comment regarding investment in NZ; as you state, the dollar conversion is almost at a parity with the AUD. Perhaps you could post on here what you discover. I was very lucky in 2009 to make a 5-year term deposit with Bankwest at an amazing 7%. Those days are, of course, long gone but it was a nice little earner, especially as I invested just before the real impact of the GFC. It’s very tricky out there for us small investors.

    • 0
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      Westie – had a look. Hard to get a NZ bank account, you have to have one of those to have a term deposit. That is the hindrance unless you were born a Kiwi. So back to the drawing board. Used to be good with NZ rental property as there is no capital gains tax. But with the International Agreement on Taxation which both countries signed the avenue has closed as well. The computer has changed the place.

  7. 0
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    In over 10 years, the interest rates on the short term Term Deposits have remained below that on the 5 year and greater Term Deposits. In that time, not once have the interest rates on Term Deposits gone up.
    The ATO will demand their tax paid on any interest earned on your Term Deposits, so make sure that you can afford that without disadvantage.
    Be prepared to step away from the big four for more than competitive rates. In my observations, Heritage are among the best. And snapping hard at their heels we have companies not usually associated with financial investment, including the RACQ and NRMA offering Term Deposit rates better than others readily identifiable.
    The gross earnings may not be particularly good, but they are steady and secure,

  8. 0
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    I have my nest egg invested with ING. Two accounts are required to be set up – their Everyday Orange account which requires that a deposit of $1000 is deposited each month. My pension takes care of this requirement. Secondly, you are required to set up another account – which I call my Retirement Account, and into which I transfer any saving for that month. This gives you a small interest payment of about 1.5%, which is boosted by a Bonus Interest Payment which you can earn by carrying out 5 transactions on your Orange Everyday account. This can be achieved by purchasing, for instance, a tin of cat food for about $1, and fulfills the requirement. This gives you a monthly fluctuating interest payment of 2.8%, which is better than any term deposit I can find, and the small monthly interest subsidises my Age Pension.

    • 0
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      2.8% is pretty good, Westie. Have only seen that here for St George Bank recently for new money only and for 7 months. My little investment matures next month and I already dread the little offering. NZ across the ditch has better rates and the dollar is about equal, might have a look at that if that is allowed for us little blokes. ANZ is over there as well.

    • 0
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      Westie I bet what you have got in the progress saver — or the like –read my info about them printed again below.

      —-
      The interest rates on Term deposits AND bank accounts are atrocious —
      They try to get you to use a progress saver — maybe can get 2.8% there BUT have to put more in every month or whatever AND you lose ALL interest IF you draw ANY money out — so if you have saved for quite a long time it is the BANK that gets the biggest benefit — as they keep the interest –these accounts are a total rip off –and are a bloody disgrace.

  9. 0
    0

    I should also have stated that with ING you are allowed a maximum deposit amount of $100,000 (I wish!!) You can also withdraw from any ATM without charge, as this is a strictly on-line account. The biggest plus is that your money is at call. Term deposits just tie up your money and if you need to withdraw for an emergency you lose a substantial amount of interest earned in early withdrawal fees. It’s a no-brainer really.

  10. 0
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    Hi Cowboy Jim, I’m at a bit of a loss as to how $10,000 undeclared (in the biscuit tin) would give you an extra $30 per fortnight.

    Assuming that the $10k would have been deemed at the higher rate of 3.25% (ie you already have more than $51,200 at 1.75% – otherwise you will save less), that comes to $325 pa or $12.50 per fortnight assessable. Of this you would only lose 50 cents in the dollar, meaning you only get $6.25 per fortnight extra ???

    Am I missing something here ?

    • 0
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      @Bren – have a look at that

      https://www.yourlifechoices.com.au/government/centrelink/deeming-rates-for-age-pension

      for every $1000 over the asset limit you are reduced by $3 in your pension, so $10’000 in a cookie jar means $30 extra in your pension.
      Hope that explains it – maybe not legal but I bet a lot of folks worked it out.

    • 0
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      Hi Cowboy,

      When you said ‘for deemed pensioners’ I assumed you were being paid according to the income test. Looks like you were referring to the Assets test where you are already at the lower limit for the whole pension ($258,500 if single).

      Got it. Thanks.

    • 0
      0

      Hi Cowboy,

      When you said ‘for deemed pensioners’ I assumed you were being paid according to the income test. Looks like you were referring to the Assets test where you are already at the lower limit for the whole pension ($258,500 if single).

      Got it. Thanks.

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