If you’re not careful, this condition can leave your money stuck in a term deposit you didn’t want.
Term deposits are quite a simple product on the surface. You deposit a lump sum of cash with a bank or financial institution for a fixed period of time in return for earning a fixed rate of interest on the deposit.
At the end of the term (maturity), surely you can just collect your deposit (with interest) and go home, right? Well, not always. While your interest might be deposited into a linked bank account, you might not necessarily get the principle (the amount you invested) back straight away. Instead, it might be reinvested into another term deposit, even if this isn’t what you want. This is often a default feature known as automatic rollover.
Term deposit rollover meaning
Automatic rollover is a term deposit feature where your provider will automatically start the term deposit again for the same fixed period at maturity unless you advise them otherwise. What we mean by this is your bank will contact you when your term deposit is approaching its maturity date, using the contact details you provided them. If you say nothing or don’t respond, your term deposit will start anew, for the same length of time but not necessarily the same interest rate.
According to both ASIC and various provider’s websites, there’s a good chance this new term deposit will have a lower interest rate than it did before. Not all of them will deliberately do this, but interest rates are always changing on term deposits, so it’s quite likely that by the time your term reaches maturity, the fixed rate on that particular term offered has dropped.
Your financial institution will usually notify you two weeks before your term deposit reaches maturity, but you should make a reminder in a calendar just in case.
This can be a problem though for people who see term deposits as a ‘set and forget’ product.
Remember that even if your term deposit rolls over, you’ll still receive the interest earnt from the earlier term.
ASIC’s review of automatic term deposit rollovers
In 2013, ASIC released a report detailing some of its concerns regarding automatic rollovers and the ‘dual pricing’ method of term deposits. This is where providers would heavily advertise their highest rates available on a limited number of products while having limited disclosure of their lower rates, which included products that rolled over at maturity. This report also revealed that since a prior report in 2010, consumer outcomes on term deposit outcomes had improved by billions of dollars due to:
- ADIs (authorised deposit-taking institutions) disclosing the new interest rate before their term deposit rolls over
- ADIs making their highest interest rates available on more terms, reducing the chances of rolling over to a lower interest rate
- The number of providers offering lower rates on rollovers decreasing from 47% to 11%
- Investors making significant use of the grace periods available to them.
This last point is important if you find your term deposit has rolled over without you realising it.
“It is essential that investors are provided with timely information about the risks and the return they will get if they let their deposit rollover.” – former ASIC Deputy Chairman Peter Kell in 2013.
I didn’t want my term deposit to rollover – is there anything I can do?
There is! If you miss your term deposit’s maturity date and want to cancel it or choose another one, then you can take advantage of something called a grace or ‘cooling off’ period. These are lengths of time – usually about a week – in which term deposit providers are legally required to give you the option to pull out of your term deposit after renewal. So you need to act quickly, but it can be done.
If you miss this period, then you might, unfortunately, have to cop the early exit penalties and restrictions.
Possible complications of early withdrawal
Banks don’t want term deposit customers to withdraw before the end of their term because they use these deposits for funding. As a deterrent, they often have restrictions and penalties for early withdrawal. These can include:
- Withdrawal notice periods: Money won’t be released to you until up to 31 business days after notifying the bank of your intention to withdraw – this means you may not be able to withdraw early if your term deposit has less than one month remaining
- Early exit fees: To be determined by the institution. Can be a flat fee of $30
- Interest rate reductions: Based on the length of your term remaining
It’s up to you to weigh up your options and decide if it’s worth the penalties and restrictions to withdraw early, as opposed to keeping the money deposited for another term.
If you just want your money back then you might not care too much about getting a reduced interest rate on the new term deposit. Just how much your interest would get reduced by varies, but a commonly used spread is as follows:
|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%|
Let’s look at a hypothetical example of someone being affected by the complications of having automatic rollover:
|Jack Pott wants to save a bit of money for his annual Christmas shopping for his parents, siblings and slightly bizarre cousins and decides a six-month term deposit is the best option for him. He settles on a 2.50% p.a. term deposit with a 0.10% p.a. bonus rate for first-time customers, giving him 2.60% p.a. in total.
With the $10,000 he initially stored away, he’ll earn $130 in interest. But, Jack was unfortunately away on holiday when his term deposit reached maturity and didn’t respond to his bank’s emails because he was being his best self in Thailand. Because of this, his bank automatically rolls over his term deposit to another six-month term, with a lower interest rate of 2.40%.
But Jack needs this money now because Christmas is only three weeks away. Despite his pleas to them, Jack’s bank cannot release his deposit to him for 31 days, meaning he only has the $130 in interest he earned to pay for presents for the whole family. He decides his weird cousins will have to miss out.
What else can you do at maturity?
If you want to keep your money in a term deposit after it matures, you might appreciate the convenience of an automatic rollover. If that’s the case, and you’re happy with the new interest rate and term you’re rolling over into, you can sit back and let the bank do all the work.
Aside from rolling your term deposit, you have two main options at maturity: reinvest your money in a different term deposit, or close your deposit account and have the money transferred to your nominated bank account. If you decide to do the former, then it might be worth contacting your bank to see if they’ll offer you a higher rate than what others are offering.
If you want to withdraw the money, you could consider investing in alternative assets. The infographic below shows the average annual returns (over 10 years and 20 years) for various asset classes compared to the average inflation rate. While they’re riskier investments than term deposits, these figures demonstrate that over the long-term (10+ years), you’re likely to get a higher return with these assets over a term deposit.
Savings.com.au’s two cents
As the maturity of your term deposit approaches, make sure you advise your provider what you want them to do with your funds. But don’t just take our word for it. Former ASIC Deputy Chairman Peter Kell once said in the wake of ASIC’s 2013 term deposit review:
“While term deposits are generally a safe, low-risk investment, they should not be a set-and-forget investment, and investors should still shop around to see what other rates are available.”
If you want to keep the money in a term deposit, don’t let it roll over automatically without comparing the different term deposit rates on offer across the market first. Rates are always changing and the market is highly competitive, so it’s highly likely a higher rate than your’s sprung up.