Breaking a term deposit before it matures may come with penalties and/or fees, such as adjustments to the interest or funds paid to you, or a flat administration fee for seeking to break early. This article broadly covers some of the key things you need to know about term deposit early withdrawal penalties and/or fees, and how they may be calculated.
Understanding fees vs penalties
Early withdrawal fees and early withdrawal penalties are often used interchangeably, but they do not always mean the same thing.
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Fees. Some authorised deposit-taking institutions (ADIs) charge a flat administrative fee when you request an early withdrawal. This cost is unrelated to the interest earned and is a fixed amount.
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Penalties. Also sometimes referred to as “early break costs” or “prepayment adjustments”, these penalties are an agreed reduction in the funds you receive back based on how long you’ve held the term deposit.
Note: If you’re facing proven financial hardship, early break costs may be waived by your term deposit provider, and you also may be able to access your term deposit sooner than the standard notice period.
How early withdrawal costs are calculated
Most ADIs use a sliding scale, agreed with you when you take out your term deposit, to calculate the early withdrawal penalty. The closer you are to the start of your term, the bigger the adjustment to the funds you receive on early withdrawal.
For example, withdrawing soon after opening your term deposit could mean losing an amount from your withdrawn funds equivalent to a 90% adjustment (calculated as a percentage of your term deposit interest rate), while withdrawing closer to the maturity date may mean a 20% adjustment (calculated as a percentage of your term deposit interest rate).
Each term deposit provider has its own rules about how these adjustments are applied, so it’s important to check your ADI’s specific terms and conditions. Again, there may be a flat administration fee on top of any prepayment adjustment, but it will depend on the ADI.
Notice periods for early withdrawals
When breaking a term deposit early, many ADIs require a notice period before you can withdraw your funds – usually 31 days. While providing notice allows you to access your money before maturity, as discussed above, you may still face prepayment adjustments to the funds you receive back based on how far into the term you are and/or an administration fee.
In cases of financial hardship, some institutions may waive notice periods or penalties altogether. This typically depends on individual circumstances and the specific ADI’s policies.
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