If you’re happy to lock your money away for no longer than a year in exchange for a relatively fair interest rate, a one-year term deposit could be suitable for you.
The table below displays a snapshot of some of the highest term deposit interest rates around for one-year terms.
12-month term deposit
As the name probably suggests, a 12-month term deposit is a fixed deposit that locks away your money for one year, which is the period of time known as the term. This means for one year you generally won’t be able to touch the money you deposit, but in exchange you will earn a fixed amount of interest over this period.
For example, a 1.00% p.a. term deposit for 12 months would return $100 in interest over the term if you deposited a total of $10,000.
12-month term deposits are considered to be the upper limit for ‘short’ term deposits. Other terms considered short-term offered by banks include any terms ranging from one-month to 11 months, with 6-month terms usually being the most popular.
Any longer than this and you’ll be getting a ‘long' term deposit, such as terms that are:
- 18 months
- Two years
- 30 months
- Three years
- Four years
- Five years
While some banks offer term deposits for up to seven years, five is more commonly the longest term offered to the general public.
12-month fixed deposit interest rates
With the cash rate as low as it is at the time of writing (0.10% as at May 2021), interest rates on term deposits are pretty poor in general at the moment. The average term deposit rate from the big four banks across all terms is just 0.30% p.a, according to Reserve Bank data, while Savings.com.au’s analysis of a broader section of the market found an average closer to 0.43% p.a.
Historically speaking, that’s very low, and one-year terms don’t fare much better. The average term deposit rate for one-year terms is 0.49% p.a, while the highest the typical customer can get is about 1.00% p.a in 2021.
Given the current rate of inflation is 1.10%, a lot of these one-year term deposit rates will barely even give you a real rate return (real=adjusted for inflation), so funds in a term deposit with an interest rate below the inflation rate can be considered to be going backwards in value.
But as you’ll see below, other terms don’t really fare much better.
How do 12-month deposit rates compare to other terms?
The general rule used to be ‘the longer the term the higher the rate’ and this is still somewhat true, but not by much. For example, the highest five-year rate Savings.com.au could find is 1.60% p.a at the time of writing, which is 60 basis points higher than the highest one-year rate.
The table below displays a snapshot of some of the highest term deposit interest rates around for five-year terms.
However, when you average out the rates offered by most banks among the different terms, one-year products seem to fare better. For example, Savings.com.au research found one-year terms had an average rate of 0.49% p.a across the market, compared to:
- Average rate for 2-year terms: 0.52% p.a.
- Average rate for 3-year terms: 0.54% p.a.
- Average rate for 4-year terms: 0.51% p.a.
- Average rate for 5-year terms: 0.52% p.a.
The highest average Savings.com.au found is the 0.54% p.a for a three-year term, but note that all rates are listed in per-annum figures, even for terms under 12 months. For three months, for example, the total rate of return would be a quarter of the per annum (p.a.) rate of 0.39%, which works out to be less than 0.10%.
Why should you pick a 12-month term deposit?
Perhaps the biggest reason to pick a one-year term deposit is that it could provide the best of both worlds. One-year is short enough to be considered a short-term investment, while the interest rates on offer are equal (if not better on average) than longer-term deposits.
Term deposits with longer-terms require you to lock your money away for longer without necessarily offering much higher rates, although our term deposit comparison tables show there are still some high longer-term deposit rates available if you know where to look.
What about shorter terms?
Short term deposits (terms shorter than a year) often earn less interest but can still be a quick and easy way to earn something on your investment. They can be good for short-term savings goals, like for a holiday or for Christmas presents, but you could argue savings accounts are also good for this while being a more flexible product.
Short term deposits also mean you might not have to worry as much about potentially breaking from the term deposit early, which is a flaw with longer terms.
Should you pick a longer-term deposit?
Term deposits are available from most banks for terms of up to five (and sometimes seven) years, which is a long time to have your money locked away. Should you need this money in an emergency, for example, you’d probably have to suffer an interest rate reduction relevant to how much of your term has elapsed, as well as providing at least 31 days of notice to the bank.
Percentage of the term
Interest rate reduction
0% to 20%
20% to 40%
40% to 60%
60% to 80%
80% to 100%
A common example of how banks lower your interest rate if you decide to cash out from a term deposit early.
But there are benefits to long-term deposits. For one, it’s possible to get higher interest rates, and two, they’re also useful for avoiding interest rate cuts. If you’d taken out a five-year term deposit a few years ago, you’re likely to still be earning an interest rate in excess of 3% or even 4% p.a, whereas you’d be lucky to get one above 1.00% p.a now.
This also means you could miss out on potential interest rate increases, however.
The pros and cons of short vs long-term deposits
Here’s a summary of the advantages and disadvantages of short and long-term deposits:
- One-year terms have higher rates on average at the time of writing
- Money isn’t locked away for too long
- Useful for short-term savings goals
- Are more flexible than long-term deposits
- Leading interest rates tend to be higher than those of shorter terms
- More useful for disciplined savers
- Good for long-term savings goals
- Can avoid future cash rate cuts over the long-term
- Leading rates aren’t as high as longer-term deposits
- Not as useful for long-term savings goals
- Not all long-term deposits have good rates
- Are less flexible - there’s more of a chance you’ll need to withdraw during the term
- Greater likelihood of missing out on future cash rate rises
Both short and long-term deposits can automatically roll over when the term expires, which may be a bad thing if you don’t want to commit to another one!
Frequently asked questions
1. What does a term deposit mean?
The word ‘term’ for term deposit is a length of time, which can be anything from one month to five years. And ‘deposit’ means locking your money away with a bank for that term. So a ‘term deposit’ is a secure banking product where you store a set amount of money away for a pre-specified length of time in return for a fixed amount of interest.
2. Are term deposits worth it?
There’s no one answer to this question. It depends what you’re after. Term deposits might be a good choice if you’re looking for a relatively safe, cash-only investment for a specified period of time at a locked-in interest rate. But if you’re looking for a high rate of return, you might need to look elsewhere.
Compare term deposits here to see some high term deposit interest rates.
3. How safe are term deposits?
Term deposits are generally considered to be a very safe investment as there’s little to no chance of losing your money.
To offer term deposits a bank must be a registered ADI (authorised deposit-taking institution), and any ADI is covered by the Australian government guarantee, which protects your deposits up to $250,000 per bank.
So if your bank collapses (which almost never happens), up to $250,000 of your money will be returned to you.
4. Can you add money to a term deposit?
No, with the vast majority of term deposits you cannot add money to them during the length of the fixed term. Some banks offer an exception where you can add or withdraw money during the grace period, but this is usually only about a week or so after opening or renewing the deposit.
5. Are term deposit interest earnings taxable?
Yes, interest earned on term deposits is taxable, just as your regular income or savings account interest is.
Term deposit interest earnings are to be included in your annual tax return. If your term deposit pays interest at maturity after three years, then you’d only list it as taxable income after that final third year. But if it pays interest annually, then you’d need to include it in each financial year’s return.
6. Can you withdraw a term deposit early?
You can withdraw early from a term deposit, but unless you’re experiencing financial hardship, you usually can’t do so without facing a penalty.
In addition to requiring up to 31 days notice, most banks will also charge an interest rate reduction relative to the length of your term that’s expired. You may also be charged an early termination (or break) fee.
7. How is interest calculated on a term deposit?
Term deposit interest is usually calculated on a simple basis: as a percentage of your initial investment. If, for example, you deposit $10,000 for one-year at a 1.00% interest rate, then at maturity you’d have earned $100 in interest.
There are a very small number of term deposits in Australia that allow interest to compound, although the interest rates on these products tend to be low.
Savings.com.au’s two cents
A one-year term deposit could be a good choice for someone looking to safely invest their money and get a decent return on it, but one-year term deposits aren’t without their flaws. Term deposit rates are quite low in general at the moment, and there are some higher interest rates available on savings account products which can offer more flexibility.
Before committing your money to a term deposit, ask the following questions:
- What are you saving for?
- What kind of interest rate are you after?
- How long can you afford to not touch that money for?
- And what will happen to the cash rate while the money is in there?
The most important thing with a term deposit, however, is to get a good rate, something that’s becoming harder and harder to find. Our list of highest term deposit rates is a good place to start.