Savings accounts vs term deposits: which should you choose?

author-avatar By on May 06, 2021
Savings accounts vs term deposits: which should you choose?

There are some fundamental differences – and similarities – between term deposits and savings accounts.

Two of the more basic ways of earning a return on your money are through savings accounts and term deposits. These are relatively low-risk products, especially given the government guarantees up to $250,000 of your funds with any ADI (authorised deposit-taking institution). So, if you’ve got a lump of cash you want to tuck away without the threat of it plunging in value, a savings account or a term deposit could be good options for you.

But which of the two might be the better option? Savings.com.au has compiled the differences and similarities between savings accounts and term deposits to help you make an informed decision, comparing them on:

  • Interest rates
  • Fees
  • Flexibility and stability
  • Extra features

First thing first – What are they?

What is a savings account?

A savings account is a bank account that allows you to deposit and withdraw money and earn a variable rate of interest on it. Unlike a transaction account, savings accounts typically don’t come with a debit or EFTPOS card, so the funds are generally less accessible.

While you generally can’t transact with a savings account, most allow you to transfer money in and out of it at any time online.

Compare high savings account rates 

The table below features savings accounts with some of the highest interest rates on the market.

What is a term deposit?

A term deposit is a product which locks away a sum of money on a fixed interest rate for a fixed period of time. Unlike savings accounts, most term deposits do not allow you to access your money without a cost – see the ‘fees’ section below for more information on how this works.

Patrick Nolan, General Manager of Deposits at Judo Bank, says you might consider a term deposit as a 'simple and safe' alternative'. 

"The main reason a customer takes out a TD (term deposit) over other forms of savings is a ‘fixed or guaranteed return’. With a TD the customer knows exactly what return they will receive from a deposit the moment they put the funds in," Mr Nolan told savings.com.au. 

"Other investment vehicles can have a lot of variation and no guarantees of a return.

"Customers also like the simplicity of the product. I put in the money and can get my interest paid at maturity or monthly and the process to establish, fund and manage a term deposit is very easy. 

"At Judo Bank we also offer a loyalty bonus if customers roll over their principal. In this way we are encouraging customers to save."

Related: Term deposits with bonus loyalty rates

Compare high term deposit rates 

Looking for a good term deposit? The table below displays some of the highest term deposit interest rates available for a 6-month term.

Interest rates: savings accounts vs term deposits 

Interest rates have historically been pretty matched between term deposits and savings accounts. Both products have been strongly tied to the official cash rate in the past, so with the cash rate at record lows, there's not much to cheer about when it comes to the interest rates for these products at the moment. 

The infographic below demonstrates how savings account interest rates have changed over time since 2002.

Term deposit rates hardly fare any better. Based on a comparison between hundreds of different term deposits across a variety of short and long terms, the average deposit rate is just 0.43% p.a as of May 2021. Among just the big four banks, that average falls to 0.30% p.a. 

See here for an in-depth comparison between the interest rates on term deposits and savings accounts over a longer period of time. 

Differences between a savings account and a term deposit

Savings accounts

Interest rates on savings accounts are variable, not fixed, meaning providers can change them at will depending on external factors (like the cash rate increasing or decreasing) or internal factors (bank profits down). This can be a good thing for savers in a rising interest rate environment but bad when rates are falling.

The highest total interest rate at the time of writing (May 2021) is 1.35% p.a, a number that can get as high as 3% p.a for those under 30 years of age. But the highest base interest rate is much lower, sitting at around 1% p.a, and is usually even lower at around 0.50% p.a on average and as low as 0.01% p.a. 

When you factor in bonus interest rates (the additional interest you can earn on by meeting specific conditions), you're more likely to get something in excess of 1% p.a.

Read our article on the different types of savings account interest rates to learn more about base, bonus and total interest rates, and see our list of the highest savings account interest rates here

Term deposits

Term deposit rates are fixed for the length of a term, so unlike savings accounts, you don't experience either a rise or a fall in your term deposit interest rate. You get what's been offered by the bank. 

According to the RBA's Retail Deposit and Investment Rates data and Savings.com.au's own research, these are the average term deposit rates (as at May 2021) for various term lengths:

Largest banks
Market 
One month 0.05% p.a. 0.09% p.a.
Three months 0.10% p.a. 0.39% p.a.
Six months 0.15% p.a. 0.47% p.a.
One year 0.30% p.a. 0.49% p.a.
Three year  0.35% p.a. 0.54% p.a.

By looking around, you can get rates about as high as 1.60% p.a, depending on who you pick, but there aren't too many. If you'd looked about a few years ago, you might have been able to find rates in excess of 3.00% p.a, but those days likely won't be seen again for several years at least. 

How you might earn more interest on savings accounts than term deposits

Say you deposited $10,000 in both a savings account and a term deposit for two years, with both paying an interest rate of 1.30% p.a. At the end of these two years, the savings account will have earned you roughly $263 (assuming there were no interest rate changes), and the term deposit slightly less at exactly $260. Why is this? 

The reason is savings accounts earn compound interest while term deposits earn simple interest

With compound interest, the initial principal (the $10,000) earns interest as well as the previous interest earned. So you earn interest upon your interest. Term deposits typically earn simple interest, where interest is paid at the end of a specified term on the principal. 

You'll find that the bigger the investment the greater the difference between savings accounts and term deposits. For example, by depositing $50,000 instead of $10,000, the savings account in the example above will earn roughly $1,316 in interest while the term deposit earns $1,300.

Some longer-term deposits give you the option of earning fortnightly, monthly, quarterly, or annual interest payments (see more detail on this in the 'features' section below). Term deposit rates also don't fall for the entire duration of your term, whereas savings account rates can. 

Fees

As with most financial products, there are fees to consider, and some products charge less than others.

Savings accounts

Most savings accounts don't charge any fees, but some may charge:

  • Monthly account-keeping fees
  • Electronic transaction fees
  • Branch deposit fees 
  • Over-the-counter transaction fees 

According to Savings.com.au’s research, the highest monthly account keeping fee is $6 while the lowest is $5, so you could be paying between $60-$70 every year in account keeping fees, potentially eroding most of the interest you’ve worked so hard to earn.

See our article on fee-free savings accounts to learn more on how much of these fees can cost you, and compare a selection of fee-free savings accounts in the table below: 

Term deposits

Most term deposits don’t actually charge many (if any) fees nowadays. Most providers do charge a penalty for early withdrawals though, which can either be a flat fee or a tiered ‘interest rate reduction’ that lowers your fixed rate depending on how long you have left in your term.

Although the exact reduction will depend on your provider, it’s not uncommon for them to reduce your rate like this:

Percentage of the term 

elapsed

Interest rate reduction

0% to 20%

90%

20% to 40%

80%

40% to 60%

60%

60% to 80%

40%

80% to 100%

20%

So withdrawing from your term deposit halfway through might mean you’d only earn an interest rate that’s 40% of what was advertised. This can be a bigger cost than any savings account fee.

Stability and flexibility

Both term deposits and savings accounts are generally safe places to store your money, as deposits with any institution on APRA’s list of authorised deposit-taking institutions (ADIs) are guaranteed by the government on amounts up to $250,000. Term deposits tend to be more stable due to their fixed interest rate, which isn’t always a good thing.

Savings accounts

Savings accounts are more flexible than term deposits. You can transfer money in or out of them at any time, although you might fail to meet your bonus interest rate conditions (if your account has any) in doing so. You can also set up automatic transfers in or out to help meet your savings goals – some people choose to deposit a portion of their salary into their savings account every month.

Term deposits

If you’re after flexibility then look elsewhere, because term deposits are a pretty inflexible product. You can’t withdraw from them without incurring a penalty, and some even require you to give up to 31 days notice. Making extra deposits is also not available with most term deposits, so savings accounts are the clear winner on the flexibility front.

This lack of flexibility can be a positive for some – you might want your money locked away for a certain period of time so you aren’t tempted to access it, which is much easier with a savings account. Term deposits are particularly popular with senior investors over 65, who don’t mind exchanging flexibility for peace of mind and a stable interest return.

Extra features

Sometimes you might want a little extra when storing your cash. In most cases, it's savings accounts again that come out on top here. 

Savings accounts

Features on savings accounts can vary between providers. In addition to offering bonus interest rates and little to no fees, a number of savings accounts allow for multiple linked transaction accounts, so customers can allocate money to different spend types. For example, you can have one account for 'fixed' costs, like bills, insurance premiums and mortgage repayments, while keeping another one for everyday spending. 

Savings accounts can also come with apps that let you view your balance and track daily spending, while some of the more advanced banking apps feature savings tools like 'automatic round ups' which save small amounts from your daily transactions, or daily spending limits based on your money habits. 

Research from Roy Morgan in 2017 found that 8.3 million people in Australia use mobile banking, a near 72% increase from four years prior. Millennials are the clear leader here with mobile banking usage levels at nearly two-thirds, so it would seem banks with useful and attractive mobile apps will continue to become more important in the years to come.  

Term deposits 

Term deposits are pretty light in terms of features - they're a very simple product, so most of them are of the 'put your money in and just come back later' type. One feature that some term deposits offer is different interest payment periods. On longer-term deposits (usually more than a year), you can sometimes request to have interest paid: 

  • Fortnightly 
  • Monthly 
  • Quarterly 
  • Semi-annually 
  • Annually 

These more frequent payment periods allow for the effect of compound interest, but won't necessarily lead to higher interest earnings in total. You might find that the bank offers slightly lower interest rates in exchange for compounding interest. With these shorter interest periods, you can either have it added to your term deposit balance or be paid into your savings account. 

Savings.com.au's two cents 

Term deposits and savings accounts are very similar, yet different products, and both them fare better than the other in certain circumstances. Depending on what you're looking to get out of your money, below is a summary of whether the average term deposit or savings account is the winner when it comes to each of the above points: 

  • Interest rates: tie 
  • Fees: tie (unless you withdraw early from a term deposit or choose a savings account that charges monthly account-keeping fees)
  • Stability: term deposits 
  • Flexibility: savings accounts
  • Extra features: savings accounts 

When deciding between the two, you need to consider your specific requirements, your current budget, how much you can afford to invest, what your savings goal is and how likely you are to need your money in the future.

If you like having liquid access to your funds and want control over your finances while saving, you might want to go with a savings account. Alternatively, longer-term savings goals where you want to remove the temptation to access your money will likely be better suited to a term deposit. 

When comparing products, just make sure you find a good interest rate. Even in today's low-rate environment, there's plenty of competition between providers.


Photo via Smileus at Getty Images 

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William Jolly joined Savings.com.au as a Financial Journalist in 2018, after spending two years at financial research firm Canstar. In William's articles, you're likely to find complex financial topics and products broken down into everyday language. He is deeply passionate about improving the financial literacy of Australians and providing them with resources on how to save money in their everyday lives.

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