What is term deposit laddering and how does it work?

Term deposit laddering is a savings strategy that may help balance flexibility and returns. Instead of putting all your money into one long-term deposit, you split it across several deposits with different maturity dates. This article broadly explains how term deposit laddering works and some benefits and considerations of this strategy.

Key points covered

• Laddering example
• Some benefits
• Is laddering right for you?
• Finding a term deposit

How term deposit laddering works

Term deposit laddering involves splitting your overall investment into smaller amounts and putting each into separate term deposits with different maturity dates. It’s essentially short-term investments interspersed with long-term investments so that your money isn't all locked up at once. Remember, you’ll still need to meet the minimum deposit required by the provider for each term deposit.

Here’s how it works in theory, using $100 as an example

1. Split your investment: You split your $100 into various deposit amounts. It doesn’t have to be equal, either. You can choose to put $20 in one term deposit, $30 in another and $50 in the last account.
2. Choose different maturity dates: Then, you invest each amount in term deposits with different lengths. This could look like six months, 12 months and two years, for example.
3. Reinvest upon maturity: When one deposit matures, you can reinvest it, creating a cycle where your deposits mature at different times.

This way, you have a rolling system that gives you access to your money regularly while still earning interest on longer-term deposits.

Benefits of term deposit laddering

Laddering may be a suitable strategy for people who want both flexibility and the potential for higher returns.

Here are some potential benefits

• Potentially better interest rates. Laddering may allow you to take advantage of the potentially higher rates offered on long-term deposits without locking away all your money for an extended period.

• Regular access to funds. One of the biggest benefits of laddering is that you get regular access to portions of your funds. When one deposit matures, you can choose to reinvest or withdraw, giving you liquidity without penalties.

• Adapt to changing rates. If interest rates rise, laddering in theory allows you to reinvest maturing funds at potentially better rates. Or, if interest rates fall, you can invest in shorter-term deposits and potentially take advantage of future rate rises. This can make laddering a flexible strategy in fluctuating interest rate environments.

• Explore Judo’s term deposit comparison calculator

Term deposit laddering considerations

When setting up a term deposit laddering strategy, there are a few key things you may want to keep in mind to help it align with your particular financial goals

• Interest rate trends. Keep an eye on rate trends. If rates are rising, laddering may help you take advantage of better returns as deposits mature. However, if rates are falling, you might end up reinvesting at a lower rate.

• Early withdrawal penalties. Be aware of potential penalties and notice periods for accessing funds early. Laddering may help reduce the need to break deposits early, but if you do need liquidity, there may be early break costs involved.

• Investment horizon. Consider how long you can afford to lock away portions of your money. While laddering can provide regular access to funds, the longer-term deposits will still be locked in for their full duration (unless you break early, which may result in penalties).

Choosing a term deposit provider

Below are just some of the key considerations when choosing a term deposit provider

• Interest rates: It may be worthwhile comparing interest rates across various providers to secure a higher return for your chosen term.

• Term length options: Consider the term lengths the provider offers, as this may vary across different ADIs.

• Minimum deposit requirement: Different providers may have varying minimum deposit amounts – for example, $1,000 to $5,000 – so it's important to check what is required to open a term deposit.

• Early withdrawal penalties and conditions: Familiarise yourself with any penalties
  and notice periods associated with early withdrawals, as accessing your funds before maturity may reduce your returns.

• Maturity options: Understand what happens when your deposit matures, including any automatic renewal terms and the length of the grace period for adjusting terms or topping up your funds.

• ADI: Make sure the provider is an authorised deposit-taking institution (ADI) regulated by APRA, so your deposits are protected under the Financial Claims Scheme (up to $250,000 per account holder, per ADI).

• Additional features: Some providers may offer extra benefits, such as bonus rates for reinvesting either the principal or the principal and interest from a maturing term deposit.

• Fees and charges: Confirm whether there are any set-up or ongoing fees associated with the term deposit, as most should be fee-free. Some ADIs charge admin fees for things like early withdrawal from your term deposit (unless you can prove financial hardship).

• Online banking capabilities: Check if the provider offers online access for managing your term deposit as this may help you simplify managing your account.

FAQs

What is the ideal number of term deposits in a laddering strategy?

Laddering can be as simple or as complicated as you like – it all depends on your financial goals and the flexibility you need. In theory, the more "rungs" in your ladder, the more frequent your access to funds, but this can also mean more time spent reinvesting as each deposit matures. It also means you’ll need to keep a close eye on your term deposits and manage your ladder appropriately.

Should you adjust your ladder over time?

Whether or not you adjust your ladder depends on your particular financial goals and market conditions. If interest rates rise, for example, you might choose to reinvest in longer-term deposits to take advantage of better rates. However, if you need more liquidity, you could shorten the length of your next deposit. Term deposit laddering offers flexibility to adapt as your financial situation or market conditions change.

Can I create a ladder with varying deposit amounts?

A term deposit ladder doesn’t require equal amounts for each deposit. You can choose to invest different amounts depending on your liquidity needs or financial goals.

Important Information

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