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.
Looking for a good term deposit? The table below displays some of the highest term deposit interest rates available for a 6-month term.
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 allow interest to compound if you choose for the interest to be paid at maturity. As at January 2020, only five providers in Australia offer term deposits with compounding interest
Of these, most compound interest annually, although there are some that offer semi-annual, quarterly and monthly compounding options. This results in greater returns 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 September 2020 (compared to January 2020 for reference) are:
|
January 2020: % p.a.
|
September 2020: % p.a.
|
|
|---|---|---|
| One month | 0.70% | 0.15% |
| Three months | 1.30% | 0.55% |
| Six months | 1.20% | 0.60% |
| One year | 1.25% | 0.75% |
| Three years | 1.25% | 0.95% |
You can see that an average term deposit from a major bank gives you a measly 0.15% p.a. for one month - that's less than one quarter the current rate of inflation (0.70% as at the September 2020 quarter). Longer term deposits fare slightly better, giving returns of almost 1.00% p.a, which is still very low.
These figures are just from the major banks though. By looking around some of the smaller institutions, you can find term deposits rates as high as 1.30% p.a.
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.
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 1.30% p.a.
- Person 2 wants to invest in a one-year term deposit, which is currently offering 1.80% p.a.
- Person 3 has longer-term ambitions and puts their money away for two years at 2.20% 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) | 1.30% p.a. | $32.50 |
| Person 2 (one year TD) | 1.80% p.a. | $175 |
| Person 3 (five year TD) | 2.40% p.a. | $445 |
Should you go for a short or long-term deposit?
Short and long-term deposits both have their benefits for different reasons.
Pros and cons of long-term deposits
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.
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, 2.40% p.a. may sound okay at the moment, but what if in three years' time the average savings account is paying 4.00% p.a. and you're still stuck with that same rate 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. Plus with the cash rate as low as it is, there isn't much room for the cash rate to go anywhere but up in the next few years.
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!
Pros and cons of short-term deposits
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.
Savings.com.au'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.
Article first published January 25, 2019. Updated December 1, 2020.
Brooke Cooper
William Jolly
