Term Deposits in Australia: Everything You Need to Know

What is a Term Deposit?

A term deposit is a fixed-term investment held at a financial institution. It offers a guaranteed interest rate over a specified period, ranging from one month to several years. The money invested in a term deposit is locked in for the term, with interest paid at regular intervals or at maturity.

In Australia, you’ll need to find an authorised deposit-taking institution (ADI) to earn a fixed interest rate for the duration of your term deposit. While most are banks, credit unions and building societies also offer these popular financial products.

How Does a Term Deposit in Australia Work?

When you open a term deposit in Australia, you agree to leave a specific amount of money in the bank for a set period. In return, the bank pays you interest at a predetermined rate, which is usually higher than a regular savings account.

But here’s the really good news: The interest rate remains fixed for the term's duration, ensuring predictable returns — regardless of monetary policy decisions made by the Reserve Bank of Australia.

The terms available usually start from one month, but they can last up to years. If you can deposit the minimum amount and commit to leaving your money in your account, you’re eligible for a term deposit in Australia.

The Advantages and Disadvantages of Term Deposits

Like any financial product, term deposits aren’t for everyone. While they offer obvious advantages, there are some significant drawbacks to consider before committing your cash.

Term Deposit Advantages

If you definitely won’t need your cash for the duration of a term deposit, you can look forward to some pretty impressive benefits.

Secure Investment

A term deposit is a low-risk investment option, as it guarantees a fixed rate of return on your capital. Just make sure you avoid potential scams. The warning signs to look out for include unusually high interest rates, offers that purport to beat future inflation rates and unsolicited approaches from financial advisors.

Guaranteed Return

Because this investment product offers a fixed interest rate, you know exactly what your return will be at maturity. This level of certainty could be very important to your overall investment portfolio. If the RBA’s cash rate is high, the returns will be relatively impressive. But the opposite is true if the cash rate is low when you make the initial deposit.

Government Protection

Deposits are usually protected under the Australian Government's Financial Claims Scheme. To ensure you’re protected, check the Australian Securities and Investments Commission (ASIC) website. Use their search feature to look up the financial institution by its name or Australian Company Number (ACN).

Flexible Terms

In most cases, the longer the term, the higher the interest rate. Assess your current financial status and your plans for the future. Work out how long you can commit to, and choose the option that best suits your requirements.

Term Deposit Disadvantages

Australian term deposits are great for investors who like steady, guaranteed returns. However, they’re not without their pitfalls.

Limited Liquidity

Funds are inaccessible during the term without incurring penalties. In addition, you may lose the right to earn any interest — even if you only make a partial withdrawal.

Lower Returns

Compared to other investment options, term deposits generally offer lower returns. But a lot of investors favour them because they offer a steady return — regardless of what happens to the Australian economy.

Inflation Risk

Fixed interest rates might not keep up with inflation, potentially reducing the real value of your investment over time. However, when inflation is particularly low, your returns might grow the true value of your investment at a faster rate.

Top Tips for Australians Searching for a Term Deposit

Take some time to assess your current position, your financial objectives and your plans for the future.

Compare Term Deposit Features

When you’re comparing term deposit options, take a close look at the interest rate being offered for your preferred term. Also, make sure you know how interest will be paid. Some products pay monthly while others pay a lump sum on maturity.

Another issue to consider is the various terms available, and how interest rates differ between them. Generally speaking, you’ll get better interest rates for longer commitments. And certain terms may be associated with minimum investment amounts.

Finally, pay close attention to any applicable fees. Some options involve set-up and account fees, which can significantly affect your long-term returns. And while you shouldn’t choose a term deposit if you can’t commit your cash for the agreed term, make sure you know how much an early withdrawal will cost you.

Diversify Your Investment Portfolio

Consider splitting your investment across different terms or institutions to manage risk. And seek the advice of a financial advisor to ensure you have the right mix of different investments in your portfolio. A term deposit is a great option for certainty, but it’s just one investment option of many in Australia.

Review Your Term Deposit Regularly

Keep an eye on interest rates and be ready to switch your term deposit upon maturity if better rates are available. If there’s a dramatic shift in the economy, the early withdrawal penalties that apply to your term deposit might be worth paying. However, you should seek the advice of a professional financial advisor before making any decisions.

Conclusion

If you’re looking for a low-risk investment opportunity that delivers a steady return, consider a term deposit. While you might be able to make greater returns elsewhere, the certainty offered by this type of investment is its greatest benefit.

Just make sure you have a plan in place when your term deposit matures. Some plans roll over into new term deposits if you don’t take action.

But if you’re prepared to let your money sit in an account for a fixed period, and you’re confident you won’t need any of it before maturity, a term deposit is usually a great addition to any investment portfolio.