Term deposits are seen as a low-risk way to grow your savings thanks to the security of a fixed interest rate and the protection offered by the Australian Government’s Financial Claims Scheme (FCS). This article explores why term deposits are considered low risk, and the safeguards that are in place to protect your savings.
Key topics covered
- Financial Claims Scheme
- Term deposit (TD) safety features
- Potential risks of TDs
Australian Government FCS explained
One of the key protections for term deposits in Australia is the FCS. This government-backed guarantee is designed to keep certain deposits safe in the rare event an authorised deposit-taking institution (ADI) fails.
● The FCS protects certain deposits of up to $250,000 per person, per ADI. If your ADI was to fail, the FCS should cover up to $250,000 of your deposit.
The FCS applies to a wide range of accounts, including savings accounts, term deposits, and cash management accounts. It’s worth mentioning that some ADIs operate under multiple brands. This means deposits with these brands are counted together for FCS protection purposes and this may impact a depositor’s total FCS coverage in the unlikely event that the FCS is activated. Visit APRA for more information on the FCS.
Term deposit safety features
Term deposits are considered a safe way to grow your savings for a few reasons, such as
- Fixed interest rates. The interest rate on a term deposit is locked in for the entire term, so you know exactly how much you’ll earn by the end. This stability can be particularly valuable in times of market uncertainty.
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Regulated by APRA. All ADIs in Australia are regulated by the Australian Prudential Regulation Authority (APRA). This means these institutions must meet strict prudential and reporting standards, providing an added layer of security for your term deposit.
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Low-risk investment. Unlike more volatile investments like shares or property, term deposits are considered relatively low risk. Provided your type of deposit is covered by the FCS, your principal (the amount you initially deposit) is protected up to $250,000 per ADI, and with a fixed interest rate, your money and returns are generally secure (unless you break the term deposit early and face potential early break costs and/or fees, which may be waived in cases of proven financial hardship).
While term deposits are generally considered a safe investment, here are some potential risks to consider
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Early break costs. If you need to take out your money before the term ends, you may face penalties, such as an adjustment to the interest or returns paid to you. You also must typically give 31 days' notice before being able to access your money. As mentioned, these penalties may be waived in cases of proven financial hardship.
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Inflation risk. Over time, inflation can reduce the buying power of your money. Even though your principal and interest are secure, they may not keep up with rising prices, especially if your money is locked away for a long period and interest rates go up during your investment term.
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Opportunity cost. By committing your money to a term deposit, you might miss out on other investment opportunities that could offer higher returns, like shares or property. This may be something to consider depending on your financial goals.
Important Information
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