How the different term deposit 'terms' affect your returns

author-avatar By on January 24,2019
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How the different term deposit 'terms' affect your returns

Learn how to choose the right term on your term deposit to maximise the interest you earn.

Term deposits might come across as a very simple product, but that doesn’t mean you should take a ‘one size fits all’ approach when selecting one. Banks can have dozens of different term deposits, and each one can lead to different interest returns.

One of the biggest differences between term deposits is the length of the term.

What is a term?

The ‘term’ in term deposit is the fixed amount of time your money is deposited with that financial institution. These terms also come with a fixed rate of interest, which as we’ll explain in more detail further down, vary depending on:

  • How long the term is
  • How often interest is paid (e.g. quarterly, annually, at maturity etc.)
  • How much you’re depositing (sometimes)
  • Whether or not the interest is compounded

Whatever term you choose, most term deposits require you to lock this money away for the entire time. If you need to access it early, you’ll typically have to wait up to 31 business days and possibly be hit with a break fee and a reduction in your interest rate.

What terms are available?

Each ADI (authorised deposit-taking institution) that offers term deposits will have different terms on offer. Some will offer only a few, while others will provide a huge variety of options.

Term deposits are generally available in the following terms, from shortest to longest:

  • One month
  • Two months
  • Three months
  • Six months
  • Nine months
  • One year
  • Two years
  • Three years
  • Four years
  • Five years

Typically, ‘short-term deposits‘ last for less than one year, while anything over a year is classified as a ‘long-term deposit‘. It is possible to get term deposits with terms up to seven years, but these are less common.

You may choose for your interest to be paid at maturity or into your bank account at regular intervals (e.g. monthly, quarterly, semi-annually, annually), but keep in mind most providers have lower rates on term deposits that pay interest regularly.

Also, a small number of term deposits also allow interest to compound if you choose for the interest to be paid at maturity. As at January 2019, only eight providers in Australia offer compounding interest.

Of these, most compound interest annually, although there are some that offer semi-annual, quarterly and monthly compounding options. But does this result in greater returns?

Yes, so long as the interest rate isn’t lower than the non-compounding option.

Some providers will have reduced interest rates on term deposits that allow compounding interest, because a compounding term deposit with will earn significantly more interest than a non-compounding term deposit with the same interest rate.

How the different terms affect your interest

Longer term deposits generally offer higher interest rates than shorter ones, although this isn’t always the case. According to the RBA’s Retail Deposit and Investment Rates data, the average interest rates from Australia’s five largest banks as at December 2018 are:

  • One month: 1.40% p.a.
  • Three months: 1.90% p.a.
  • Six months: 2.00% p.a.
  • One year: 2.20% p.a.
  • Three years: 2.45% p.a.

You can see that an average term deposit from a major bank gives you a measly 1.40% p.a. for one month – that’s below the current rate of inflation (1.90% as at January 2019). But longer-term deposits can give you an average of up to 2.45% p.a. These figures are just from the major banks too. By looking around some of the smaller institutions, you can find rates as high as 3.00% p.a. for three-year term deposits and 3.40% p.a. for five-year term deposits, as at December 2018.

Looking at the graph below of the average rates across the market for different terms, you can clearly see that longer terms tend to come with higher rates.

short term long term td 1

Case study: Different term deposit terms

Three separate people have $10,000 to invest in a non-compounding term deposit at the same bank:

  • Person 1 wants to invest in a short-term term deposit for three months, which gives them an interest rate of 1.80% p.a. 
  • Person 2 wants to invest in a one-year term deposit, which is currently offering 2.20% p.a. 
  • Person 3 has longer-term ambitions and puts their money away for five years at 3.20% p.a. 

These different interest rates will yield vastly different returns. 

  Interest rate (paid at maturity)Interest earned on $10,000 at maturity 
Person 1 (three month TD) 1.80% p.a. $45
Person 2 (one year TD) 2.20% p.a. $220
Person 3 (five year TD) 3.20% p.a. $1,600

Should you go for a short or long-term deposit?

Short and long-term deposits both have their benefits for different reasons. Long-term deposits obviously provide a much larger sum of interest for the same amount of money, with or without compounding interest. But long-term deposits also require you to not touch this money for the entire term, unless you want to cop a reduced interest rate and a potential break fee. Two to five years is a long time to be without a substantial sum of money, and if you were to ever need it, you’d lose significant interest.

short term long term td 2

Also by locking yourself into a long-term deposit, you run the risk of missing out on interest rate rises over that term. For instance, 3.40% p.a. may sound good in 2019, but what if in three years’ time the average savings account is paying 5.00% p.a. and you’re still stuck with 3.40% p.a. for another two years? Of course, interest rates could also drop over this time, but banks generally price their term deposit rates based on their in-house economist’s interest rate forecasts.

But having this money locked away long-term can also be a blessing. A lot of term deposit users prefer not being able to access the money because it forces them to save. This is different to a savings account where money can be withdrawn at will. Long-term deposits don’t give you the option of losing willpower!

Short-term deposits, on the other hand, generally earn less interest due to the lack of time, but can still be a quick and easy way to earn a decent amount of interest. They can be good for short-term savings goals like holidays or Christmas presents. You just have to weigh up what you’re investing for, and whether you’re willing to part with the money for a fixed period of time.’s two cents

Long-term deposits will generally earn you more interest than short-term deposits, hence saving you more money. But before you lock those funds away for four or five years, ask yourself (or your financial advisor):

  • Will you be able to go without the money for the full term?
  • Do economists expect interest rates to fall or remain stable over the term?
  • Will you be happy to forgo the potentially higher long-term returns of investing in shares and bonds for less risk?

If you answered no to any of these questions, perhaps you may want to consider a shorter-term deposit or putting your money in another product, such as a bonus savings account. Don’t forget, some bonus savings accounts pay as much interest as some term deposits, are also covered by the ADI government deposit guarantee, earn compounding interest and come with the added convenience of allowing fast easy access to your funds.

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William Jolly joined 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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