Three term deposit traps

It’s easy to be dazzled by high interest rates you see advertised but, believe it or not, there’s a more to a term deposit than just its rate. The interest rate you earn can be eroded by the cost of having the term deposit so it pays to research and understand the pros and cons of various term deposits before deciding on what’s right for you.

Here are 3 key points to be aware of before committing to a term deposit:

1. Early exit costs:
   Are you able to get your hands on the money before the term is up? No-one plans to be caught up in an emergency but sometimes it happens and you may need to redraw your term deposit before the term is up. Banks call this “prepayment” or early withdrawal fees. They can be as high as 60% of the interest earned. In some cases, you simply cannot withdraw any cash before the term is up – even for a fee. In addition, fees can be hidden in bank cheques or transfer costs, meaning that it will cost you to withdraw your money, even at the end of the designated term. Being aware of what an early exit will cost you, should the unexpected happen and you need access to your money, will help you make a more informed decision.
2. Deposit Accounts:
   In order to take advantage of some term deposits, you have to open a deposit account with that bank? If this is the case, what are the costs involved? Any on-going account-keeping fees associated with this mandatory deposit account will eat into the high interest rate your money might be earning at term.
3. Automatic renewal:
   The most common pitfall we see. Don’t make the assumption that your money will be rolled over to a similar deal when the term is up. Some banks offer a very attractive interest rate for the initial term but, once the term is completed, the rate for a similar term can be significantly lower. Therefore if you choose to let your term deposit automatically roll over, you can find that you are not getting the best rate. To avoid this, be clear on bank rules regarding notifying you when the term is due to expire. Better still, make a diary note on your calendar and get in first. Don’t feel obligated to keep rolling your money over with the same institution. Check all the terms and rates on offer and select one that suits your needs the best. Better still, shop around for a better term or interest rate, or bank with one of a select few institutions that actually gives you a bonus for rolling over your funds.

Back to Term Deposits.