A term deposit is considered a low-risk savings product that offers a fixed interest rate for locking in your money over a set period (also known as the term length). This article provides an overview of term deposits, including some key features and factors to consider when evaluating if they might be a suitable savings option for you.
Key topics covered
- Benefits of term deposits
- Minimum deposits and term lengths
- Earning interest
- Options at maturity
- Term deposit considerations
- Early break costs
- Opening a term deposit online
How term deposits work
A term deposit requires you to deposit a certain amount of money with an authorised deposit-taking institution (ADI), for an agreed length of time. In return, you receive a fixed interest rate, which remains constant throughout the term, regardless of changes in market rates. At the end of the term (the "maturity date"), you get your original deposit back, plus the interest you've earned. Or, you can roll your original deposit and/or your interest into a new term deposit to keep earning interest (at the prevailing interest rate).
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Choose a term and amount. Start by deciding how much you want to invest and for how long. There’s usually a minimum deposit – generally anywhere between $1,000 and $5,000. Term lengths can range from a few months to several years.
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Deposit your funds. Once you've chosen the term length and deposit amount, you lock your money in for that period. Generally, you can't access it until the term ends without facing early break costs.
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Earning interest. Your deposit earns interest at a fixed rate for the duration of the term. The interest can either be paid out regularly (for example monthly or annually), or paid at the end of the term with your original deposit.
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Your deposit matures. When the term ends, you have a few options. You can roll over the principal plus interest earned into a new term deposit, you can withdraw your initial deposit and interest earned, or take out the interest earned and reinvest the principal.
Benefits of term deposits
1. Fixed interest rate. This may give you peace of mind, knowing exactly how much interest you’ll earn, no matter what happens in the market.
2. Potentially higher rates. Term deposits may offer more attractive interest rates than other savings products, especially if you’re committing to a longer term.
3. Government protection. In Australia, term deposits with ADIs are protected by the Australian Government Financial Claims Scheme. This is designed to cover deposits up to $250,000 per account holder, per ADI.
4. No ongoing fees. Term deposits typically don’t come with any account-keeping or service fees. However, be mindful you may incur early withdrawal costs if you break your term deposit before it matures.
5. No bonus rate criteria. A big point of difference between term deposits and savings accounts is that savings accounts often require you to meet certain conditions (like minimum deposits or no withdrawals) to get the highest rates. However, term deposits offer a fixed interest rate upfront with no bonus rate criteria to earn that interest.
6. May help curb spending. Since your funds are locked away for the term, it’s harder to dip into your savings. This may be helpful for anyone trying to control impulse spending while still growing their savings.
Term deposit considerations
Limited access to funds and potential early break costs. If you want to access your money early, you’ll likely face early break costs. ADIs typically require 31 days' notice to withdraw funds from a term deposit, unless financial hardship applies. Even with notice, you may also face a reduction in your interest or overall return if you withdraw early (unless proven financial hardship applies).
No option for additional deposits. You can’t add more funds to a term deposit once the term has started. If you want to deposit more money, you’ll need to open a separate term deposit or wait until the original one matures and top it up with additional funds.
Interest is fixed for the term. While a fixed rate gives you stability, it also means you won’t benefit if interest rates rise during your term.
Minimum and maximum term deposit amounts
The amount you can put in a term deposit can vary depending on the ADI. Commonly, you’ll find minimums between $1,000 (like at Judo), and up to $5,000.
Larger ADIs typically have higher minimums, while smaller institutions like credit unions or online-only ADIs might offer lower entry points to attract a wider range of customers.
The maximum deposit can be anywhere from $2 million to $5 million, though some ADIs might have different limits.
Term length options
Term deposits come in a variety of lengths, typically ranging from short-term to long-term options
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Short term: These usually range from one month to 12 months. Common durations include 3, 6, and 9 months. This might be suitable if you want to earn some interest but still need access to your money relatively soon.
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Long term: Anything over one year, typically from one to five years. Longer terms often come with higher interest rates, making them a potentially suitable option if you don’t need your money in the short term.
Interest earnings on a term deposit
The amount of interest you can earn depends on the interest rate, your deposit amount, and the length of the term.
Term deposits typically earn simple interest, which means the interest is calculated only on your initial deposit, not on the original principal plus any accumulated interest.
Receiving interest payments
Most term deposit providers give you a choice for how often you’d like to receive your interest – for example, monthly, half-yearly, annually, or when the term ends.
Just keep in mind that how often you get paid might affect the interest rate – the more frequent the payments, the lower the rate could potentially be.
Options for when your term deposit matures
When your term deposit reaches its maturity date, some of your options include
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Reinvest (roll over). If you don’t need access to the money right away, you can roll it over into a new term deposit. This allows you to keep earning interest without withdrawing the funds. Some ADIs may even offer a small bonus for reinvesting. You can also add additional funds if you wish when you roll over.
Note: Some banks may automatically roll over your term deposit into a new one at maturity, often at the current advertised rate, which might not be as good as your original rate. To avoid this, make sure to review your options and notify your bank if you don’t want the automatic roll over.
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Roll over principal and pay out interest. Some ADIs allow you to roll over your principal and withdraw the interest you earned during the term.
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Withdraw your funds. If you’d rather access your money, you can withdraw the full amount, including the interest you’ve earned. You can then use it however you see fit – whether it’s for a purchase, reinvesting elsewhere, or simply transferring it into a savings account.
Breaking a term deposit early
If you need to access your money before the term deposit reaches maturity, you’ll likely face early break costs (unless you can prove financial hardship). Broadly, these aren’t direct fees, but rather, reductions equivalent to a reduced rate of interest. The penalty usually depends on how far into the term you are when you decide to break the deposit.
Personal, SMSF and business term deposits
Some ADIs offer the following types of term deposits, but term deposits will differ from ADI to ADI, so check the relevant terms and conditions and eligibility requirements.
Personal term deposits
With a personal term deposit, you lock away a set amount of money for a fixed term, earning a fixed interest rate. They may be a suitable option if you're saving for something specific, like a holiday or home deposit, and don’t need access to your funds until the term ends.
SMSF term deposits
If you’re running a self-managed super fund, SMSF term deposits may be a suitable way to grow your retirement savings. They can be a reliable way to manage part of your super without the volatility of shares or other investments.
Business term deposits
For businesses such as companies, trusts or partnerships looking to put extra cash to work, business term deposits may be a low-risk option to earn some interest on surplus funds.
Does a term deposit fit your financial goals?
Before deciding if a term deposit is the right choice for you, it’s important to consider your personal financial situation and goals.
What are your goals? Are you saving for something specific, like a home deposit, a new car, or a holiday? Or are you looking to earn regular interest income as part of a larger financial strategy, such as in a self-managed super fund? Your goals can help determine whether a short-term or long-term deposit is better suited to your needs.
What are your saving habits? If you’ve got some extra cash, a term deposit can act as a kind of “forced savings” tool. Since you won’t be able to touch the money until the term ends (unless you break early or are facing proven financial hardship), it can help you stay disciplined. However, be sure you’re comfortable with not having access to those funds, as early withdrawal may come with penalties.
What’s the interest rate environment? Interest rates play a big role in how much you can earn with a term deposit. If rates are high, locking in a fixed rate can be a potentially smart move. But keep in mind that once your rate is set, you won’t benefit if rates go even higher during the term.
Opening a term deposit online
Once you’ve chosen the term deposit provider, amount to invest and term length, setting up a term deposit is typically straightforward. You can usually apply in 10 to 15 minutes.
Required identity documentation differs between ADIs, but some basic documents/information you may need to supply include a nominated bank account (where your money will be deposited at the end of the term if you decide not to roll over), and proof of your Australian residential address.
Also, always read the terms and conditions and Target Market Determination to help you understand the particular term deposit product you’re investing in.
Important Information
© Judo Bank Pty Ltd ABN 11 615 995 581 AFSL and Australian Credit Licence 501091 (Judo). The Information on this page (Information) does not constitute personal, legal, investment, taxation, accounting or financial product advice, is provided for general information purposes only, and has been prepared without taking into account your objectives, financial situation, tax position or needs. It is subject to Judo’s disclaimer at www.judo.bank
Before acting on any Information, you should consider whether the Information is appropriate for you having regard to your objectives, financial situation and needs. You should seek independent financial advice and read the relevant terms and conditions and relevant product documents before acquiring any product.