For the beginner series, we’re discussing the various different types of investments available. Now it’s time for the old stable Term Deposit.
A term deposit is a deposit held at a financial institution for a fixed term, much like a special transaction account with your bank. The term generally ranges from a month to a few years.
Unlike a regular transaction account, when you purchase a term deposit, you understand that the money can only be withdrawn after the term has ended. Some allow early withdrawal by giving a number of days notice, and usually comes at a high cost in fees and lost interest payments.
A loan to the Bank
You can think of a term deposit as a loan you are making to the bank. You give them a lump sum, they repay that lump sum at the end of the term, plus interest. The money you pay to the bank, building society or credit union is used by them to invest in higher gain products. It gives the bank more money and more ability to do more things. Such as invest in other products like mortgages for the retail housing market and credit cards.
The larger the the deposit, and the longer the term usually means a higher interest rate. It also depends on the institution as they offer different rates to attract your money.
Thanks to the Australian Financial Claims Scheme, term deposits are insured for up to $250,000 per customer per institution.
At the end of the term, many term deposits have an automatic ‘rollover’ clause. Commonly these ‘rollovers’ have a different rate of return, sometimes with different fees, charges and terms.
So if you do nothing, these term deposits will lock your money away at a lower rate. So make sure you shop around, compare rates and be clear when your term deposits end. As an investor, you need to keep track and stay aware of when your term deposit (or any security) expires.
The difference between a bank account and term deposit is mainly that the account is designed for transactions.
Over the past few years, term deposit returns has shrunk.
Term Deposit Pros and Cons
Pro:
- Higher interest than a transaction account
- Capital protected by the Australian Government
- Known stable investment for short to medium term
- Very low risk
Con:
- Capital is locked for the term
- High fees and penalties for early withdraw
- Interest is usually paid at the end of the term
- Usually fixed interest rate
- Additional cash can’t be added
- Lately the returns are very low
- Often auto renews as a lower rate
If you’d like to get better returns, please let us know.