A term deposit is similar to a savings account, but there are some important differences. Here’s what you need to know about how a term deposit could help with your savings strategy.
5 minute read
A term deposit works by locking a way a lump sum of money for a set length of time. That means once you’ve put your money into a term deposit, you won’t be able to access it until the term ends. In return, you’ll get a guaranteed rate of interest, so you’ll know what the return on your money will be from the outset.
Term deposits are similar to savings accounts, however there are important differences. Savings accounts for example could have a variable interest rate that can change at any time, affecting the amount of interest you could earn on your savings; on the flipside they also give you access to your money at any time rather than locking it away.
If you’ve already got some savings and don’t have an immediate need to use them, then a term deposit can be a good way to save – particularly if you’ve got a longer term goal in mind such as saving for a home deposit and want some help avoiding the temptation to dip into your savings. It’s important though that you’re sure you won’t need to access your money during the term you select.
Because a term deposit has a fixed interest rate, perhaps the biggest benefit is knowing exactly what the return on your investment will be. That means if market conditions fluctuate and interest rates drop, you can still take advantage of the higher interest rate you selected (the flipside of course is should interest rates go up, you won’t be able to switch to a higher rate until the end of the term).
Term deposits are also considered a safe investment, without the volatility of other investment classes such as shares and property. In fact, term deposits have the added security of having a government guarantee, with deposits of up to $250,000 with a recognised Australian financial institution (such as St.George) being guaranteed by the Australian government.
Probably the biggest thing to be aware of is not being able to access your money for the length of the term you’ve selected. Although it is possible to access your funds, you’ll likely not get the full interest payment that you would have earned up to that point into the term; you’ll also likely have to give 31 days’ notice unless you urgently need to access your money.
Another point to keep in mind is interest rates could go up during the term you’ve selected. If that’s the case, you won’t be able to benefit from the higher rates –of course should interest rates go lower you’ll still be locked into to the higher interest rate you’ve chosen for your term deposit.
The length of time you can choose for your term deposit ranges from as short as one month through to longer term deposits of up to five years. Generally speaking, the longer the term, the higher the interest rates are likely to be. This however isn’t a set rule.
Shorter term deposits are generally considered anything between one month up to one year. These could suit your needs if you have a savings goal in mind such as an upcoming holiday and don’t want your money locked away for too long, but equally want to remove the temptation to dip into your savings. A shorter term deposit could also be ideal if you’ve come into an unexpected lump sum of money and would like to put it somewhere safe while you decide what to do with it.
Longer term deposits could be anything from 12 months or right up to 5 years. A longer term deposit could suit your needs if you have a longer term goal such as saving for a home deposit, if you want to choose from a broader range of interest rates or even if you’d like an income stream from the interest payments during the length of the term deposit.
Options vary depending on who the term deposit provider is, but generally speaking you can choose to have interest paid monthly, half-yearly, annually or at the end of the term (at ‘maturity’). However, the frequency you choose is likely to impact the interest rate offered.
You can choose to reinvest your money into a new term deposit, either with or without the interest you’ve earned. You can also choose to add more money and open a term deposit with a bigger lump sum, or you can have your initial deposit plus interest deposited into a bank account so you can access it.
Once you know the term, the interest rate and the amount you want to invest, opening a term deposit can be done in minutes online. That means you can open a term deposit when it suits you, rather than needing to head into a branch or give the bank a call. Also, if you’re a St.George customer and are wanting to open a deposit with us, you could also be eligible for a discretionary interest rate online.
Knowing the differences between the two could help you understand how they can support you at different stages of your saving and investing journey.
Whether you’ve come into some cash or want to avoid the temptation to dip into your existing savings, here’s some ways a term deposit could help you.
This information is general in nature and has been prepared without taking your objectives, needs and overall financial situation into account. For this reason, you should consider the appropriateness for the information to your own circumstances and, if necessary, seek appropriate professional advice.