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How does a long term deposit work?
A long term deposit rate can be anywhere from 12 months to five years. This means you'd need to lock your deposit away for this length of time, and you'll earn a fixed interest rate on your investment that will be locked in too. Longer term deposit lengths often offer more competitive rates than terms of less than 12 months, but it could also be more of an inconvenience to lock your money away for more time. It could be a good option for you if you know you won't need to money in the short term.
Is a long term deposit right for you?
A long term deposit may be right for you if:
- You are happy to lock a set amount of cash away for at least one year
- You're confident you won't need the money before the term length ends
- You're looking for a low-risk, safe investment option
- You want a set-and-forget investment
- You'd prefer not to invest your deposit in shares, but you still want a small level of return
- You don't want to have ongoing deposit and savings goals to meet each month (if you're okay with this, a high interest savings account may suit you better)
Pros and cons of long term deposits
Pros
- Choice of interest payments. With a long term term deposit you have control over when the interest payments are applied. For example, you can choose to get paid interest annually or in one lump sum at the end of your term.
- No fees. You will not be charged monthly account keeping fees with a term deposit.
- Incentive to save. Facing penalties for withdrawing your money early is a good incentive to keep your money invested in the term deposit.
- Higher interest rate. Usually the longer the term, the better the fixed interest rate will be.
- Fixed interest rate. Even if the interest rate is reduced by the bank, you'll still earn the fixed rate that you got when you first opened the account (even if it's for another 4-5 years!).
- Set-and-forget investment. You don't need to meet any monthly deposit requirements like you do with a bonus savings account, and you don't need to be keeping an eye on share prices like you do when you buy shares online.
Cons
- No bonus interest. Unlike savings accounts, with a term deposit there is no bonus interest that you can earn and no introductory offer.
- Can't access the money. This is not an account for keeping as a rainy day fund, as it could take months to access if you needed to use your savings for an unexpected situation. This, along with the penalty charges, makes it difficult to use for an emergency or unexpected expense.
- Miss out on rate rises. Because the rate is fixed, if the bank increases its term deposit rates you will be stuck on the initial rate until the term reaches maturity.
What are the risks of a long term deposit?
There are things you should avoid to ensure you are getting the most benefit from your long term deposit account.
- Term deposit roll-over. The bank may roll the account into a new term deposit if you don’t let them know that you will be making your withdrawal at maturity. Before choosing to roll over the account, make sure you shop around and compare other providers rates again, as these may now be more competitive than what you're currently earning.
- Early withdrawals. If you do make a withdrawal before maturity, not only could you be charged a term deposit penalty fee, but the interest calculated will be adjusted to meet the interest you would have received for a shorter term deposit. Don't do it! If you think you might need the money earlier, it's better to choose a shorter term length.
How to I compare long term deposits
Your first decision when comparing term deposit accounts is to decide how long you want the term to be. Generally the longer the term, the better the interest rate will be, however this isn't always the case. Once you have an idea of how long you need to meet your savings goal, you should begin comparing available term deposits between the different banks, asking the following questions:
What is the frequency of interest payments?
Long term deposits can offer a range of different methods for receiving your interest, ranging from monthly, quarterly or yearly. Some accounts only pay interest when the account reaches maturity, however if this is the case, you'll lose the benefit of compound interest.
What are the fees?
You should be able to find a number of banks that charge minimal to no fees for their term deposit products. You should carefully research these fees before making your decision, and try to avoid any lenders that charge for early withdrawals (you never know if you will need to withdraw the money in an emergency situation).
What is the interest rate?
This is arguably the most important feature, and one that can differ dramatically between different lenders. Be sure that you are choosing an account with a competitive interest rate by market standards, as this will make a significant difference to your balance over a few years.
What is the minimum balance?
Unlike a savings account, you cannot open a term deposit with only a few hundred dollars. At minimum, you will find accounts that allow an initial deposit of $1,000, but most will expect more. Make sure you're comfortable with the amount required, and that you leave enough money available in your savings account for living expenses and emergencies.
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Ask an Expert
If I were to set up a trust account for a grandchild would a term deposit be better?
Hi Ginny,
Thanks for your inquiry.
It’s great to know that you are looking out for your grandchild. There are 2 types of accounts you can review for your grandchild’s trust account. A savings account and a term deposit. A high-interest savings account offers some of the best interest rates around allowing you to grow your balance as quickly as possible. Some even allow you to earn bonus interest if you satisfy specific conditions, such as depositing a minimum amount into the account each month.
Meanwhile, term deposits provide the security and consistency of guaranteed returns. These accounts let you lock in a fixed interest rate for a prearranged time period, for example, one or two years. This means you will not be affected by any interest rate drops that occur, but you won’t be able to enjoy the benefits of any rate rises being applied to your deposit.
As a friendly reminder, review the eligibility criteria and read up on the terms and conditions of the account before committing to the product. Feel free to reach out to the bank if you need any clarifications.
Best,
Nikki
If I invest 30000 into a term deposit of say 2 years, am I able to add extra to that before the term is up?
Hi Andy,
Thank you for your inquiry.
Few things regarding your concern.
Generally, the bank may roll the account into a new term deposit if you don’t let them know that you will be making your withdrawal at maturity. Before choosing to roll over the account, make sure you shop around and compare other providers rates again, as these may now be more competitive than what you’re currently earning.
Cheers,
Harold