Only Authorised Deposit-taking Institutions (ADI) can offer term deposits in Australia. These include banks, credit unions and building societies. You can view a list of Australian ADIs on APRA’s website here.
The Australian Government guarantees deposits up to $250,000 with ADIs. This means if your bank (an ADI) were to collapse, you can recover up to $250,000 of your deposited money (e.g. money in term deposits, savings accounts, home loan offset accounts etc.) with that bank from the government. This applies per person and per ADI, so you can have multiple guarantees with different ADIs, but only one with the same ADI.
Between October 2008 and February 2012, the guarantee covered deposits up to $1,000,000 as a temporary measure to help guide Australia’s banking sector through the Global Financial Crisis.
Because of the government guarantee, term deposits are generally considered to be a very low-risk investment, albeit with low returns.
What are the interest rates on term deposits?
Term deposits earn very similar interest rates to savings accounts and are heavily tied to the cash rate. Given Australia’s record-low cash rate, you’ll struggle to find a term deposit paying over 3.00% p.a. Term deposit interest rates are fixed, but they tend to vary depending on the term you choose (that’s how long you deposit your money for). Term deposits with longer terms tend to have higher interest rates than ones with shorter terms (to encourage customers to lock their money away for longer periods of time so the bank can use this money for funding), although as you can see by the average three-month term deposit rate, this isn’t always the case.
How is interest on term deposits calculated?
How interest is calculated will depend on a few things, but mainly: the size of your deposit, how long your term is, the interest payment frequency and compounding. We said before that longer-term deposits are more likely to pay higher interest rates. This is mostly true, but the frequency of repayments can lead to varying interest rates on the same term.
Do term deposits charge fees?
The majority of term deposits products are fee-free – you’d be hard pressed to find any that charge monthly account-keeping fees or introductory fees like other products. You’ll find most term deposits do charge a fee or a penalty for early withdrawals though. This 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.
|Percentage of the term elapsed
||Interest rate reduction
|0% to 20%
|20% to 40%
|40% to 60%
|60% to 80%
|80% to 100%
What features do term deposits offer?
Term deposits are very basic investment products, so you aren’t likely to find one stuffed with advanced features. The main things to look at is the interest rate and the term you want to invest for. A good term deposit product should offer a variety of terms with different interest rates for you to choose from.
That being said, there are a couple of other factors to consider when choosing a term deposit:
- Is it easy to set up? More and more banks are starting to offer term deposits through online and mobile banking – can you easily log in, open a term deposit and view your balance online?
- Automatic rollover. At maturity, certain providers will automatically ‘rollover’ your term deposit into a new one unless you expressly tell them otherwise. Remember that term deposits are difficult to withdraw from during the term, so you might not want a term deposit that does this. Make sure you read your product’s terms and conditions before opening and keep track of the end date to let your bank know you want to withdraw.
How do you open a term deposit?
Opening a term deposit can be a straightforward process. You’ll just need to provide: your personal details (name, address, phone number), proof of ID (driver’s license, Medicare card), tax file number and a nominated bank account for your funds to be deposited into at maturity.
You will need to nominate with your bank what term you want to invest for, and the corresponding interest rate. Be aware that some term deposits require a minimum investment too. The minimum is usually around $500-$1,000 but can be in excess of $100,000 for some certain term deposit products.
To actually open the term deposit, you can either do it online or by visiting a local branch. Some institutions might require you to be an existing customer to open a term deposit online.
What are the pros and cons of term deposits?
To summarise all of the above info, here’s a table of the pros and cons of term deposits:
- They’re a safe and stable investment
- Virtually no risk – you have a government guarantee of up to $250,000
- Fixed rates so you know exactly what your returns will be ahead of time
- Your money is locked away, so there’s no temptation to spend it
- Very few have upfront or ongoing fees
- No effort to maintain – set and forget!
- Interest rates are low at the moment – you’ll struggle to earn more than 3.00% p.a.
- Fixed rates so your rate won’t rise if the cash rate rises
- They’re not a flexible option and have very few features
- Not being able to withdraw your money easily isn’t ideal at times when money is short
- There are hefty interest rate reductions for early withdrawals
- No topping up term deposits with extra cash
How do you choose the right term deposit??
If you do decide to go with a term deposit, then you should look to consider everything we’ve discussed above:
- What are you investing for?
- How long do you want to invest for? Compare the terms.
- What interest rate do you want?
- Will you need to withdraw the money at any time? Look at the fees and penalties.
- Do you want the interest paid at maturity or non a regular basis?
- Are there any products offering compound interest?
- Can you apply for and close the term deposit online?
- Will it automatically rollover at maturity? Are you ok with this happening?