A term deposit is an investment product that comes with a fixed interest rate over its entire term. Since it’s fixed, returns are guaranteed, and the higher the interest rate is, the higher your returns will be.
When it comes to term deposit comparisons, you’ll see that term deposit rates in Australia vary significantly. That’s because several factors come into play when setting term deposit rates. In this article, we will take a look at the factors that influence the interest rate for term deposits:
Official cash rate from the Reserve Bank of Australia
This is one of the main factors that banks consider. When the RBA increases or lowers the cash rate, banks incorporate this change into the new interest rates of term deposits.
Amount of investment
The more money you deposit, the higher the interest rate you are likely to be offered. This is because banks want you to invest more so they have sufficient funds to offer loans.
If you’re looking for a high interest rate, you will usually see it on term deposits that are for longer terms. Why? Investing your money for a longer period allows banks to meet capital liquidity regulations and get funding for an extended term.
Type of term deposit
Some banks offer advance-notice term deposits that usually come with higher interest rates. These enable you to withdraw your money even before the end of the term as long as you give 31 days notice and pay an early withdrawal fee.
Banks may offer higher interest rates for term deposits to attract new customers and gain a bigger share of the deposit market.
Bank financial position
Banks may raise the interest rates to entice new customers and help meet the growing demand for home loans. They can also offer high interest rates for longer-term deposits to lock in secure local funding instead of relying on funds from overseas sources.
When the interest is paid
In general, the more frequently interest is paid, the high the returns are. You can choose from deposits that pay interest every month, every quarter, every six months, annually or at maturity. However, there are cases where you may get a lower interest rate if the interest is paid more frequently.
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