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What is a term deposit?

2016 Canstar Bank of the Year - Term DepositA term deposit is an investment of cash placed with a financial institution for a fixed period of time, known as the term, with a fixed interest rate for your return at the end of the term. Term deposits commonly referred to as a TD but are also known as a certificate of deposit or CD.

Fixed terms can range from 1 month to 5 years and the money can usually only be withdrawn at the end of the term. ‘Advance notice’ term deposits’ allow you to withdraw the money earlier if you pay a penalty fee and give advance notice of 31 days. You may receive a slightly higher interest rate for an advance notice term deposit than for a standard term deposit.

Term deposits are popular for use by investors who prefer receiving a set return instead of anxiously watching the daily fluctuations of the share market. Other investors use term deposits as just one part of their particular mix of investments.

According to the latest Westpac-Melbourne Institute Index of Consumer sentiment, 29.4% of consumers favour term deposits with a bank as the wisest place to increase their savings. Other customers preferred to invest in real estate (24.6%), followed by customers who used their savings for debt repayment (16.5%).

Applying for a term deposit is essentially the same as applying for a normal savings bank account, and most applications can be made online these days.

At the height of the GFC, the federal government introduced the Australian Government Deposit Guarantee Scheme to promote financial stability in Australia by ensuring that financial institutions had enough funds to run. The Financial Claims Scheme has thankfully remained in place post-GFC – a government guarantee or security on bank deposits (including term deposits) of up to $250,000 per customer per institution. (For more information, see APRA’s factsheet.)


What are the current interest rates for term deposits?

In 2015, the Reserve Bank of Australia has lowered the official cash rate twice, bringing it to a record low of 2.00% in May, and it is currently expected to hold steady at that rate.

A low cash rate doesn’t necessarily mean a lower rate for term deposits, as it is not the only factor banks consider. However, we did see a drop in term deposit rates from January to July 2015. Rates decreased for $10,000 deposits from 3.02% to 2.50% for 3 months, and from 3.61% to 2.89% for 4 years.

Among the term deposit providers we researched in 2015, 69 out of 76 cut their interest rate by less than 50 basis points (0.01%) from January to July. 12 lowered their rates by more than 50 basis points, and 4 providers did not change their rates at all.

Financial institutions prefer to fund their activities by offering ‘home grown’ term deposits to individual customers, as this is cheaper than borrowing funds from the expensive wholesale banking market.

Finding the highest interest rate before locking in your term deposit is especially important when rates are this low. You can compare the interest rates for different term deposits on our website. You can also compare the interest rates for savings accounts.


Written by: TJ Ryan

Pros and cons of term deposits


  • You receive a specified interest rate at the end of the term, regardless of whether rates fall in the meantime.
  • Savings are locked away, preventing the temptation to spend it all.
  • Australia’s Financial Claims Scheme means the government has guaranteed term deposits of up to $250,000 per customer per institution.


  • If you choose a short-dated term deposit of 3 – 12 months, you might find that the rates now on offer are lower when it’s time to renew. If you choose a long-dated term deposit of 3 – 5 years, rates might go up during your term – but you would miss out because your rate is fixed for the term.
  • Online savings accounts sometimes offer higher interest rates.
  • Your money is not available for use at any time. You pay a penalty if you need to withdraw your money early.
  • There is a minimum deposit amount required, which can be as large as $1,000 – $10,000.
  • You sometimes need to go into a branch, rather than being able to manage your account entirely online.
  • Interest does not compound – it is simple interest, a fixed percentage paid at the end of the term.
  • Many term deposits automatically renew when the term comes due – but they don’t renew at the same interest rate! To avoid automatic renewal, find out whether or not your financial institution will notify you when the term is due to expire, and make a diary note in your diary to give yourself extra time to shop around for the best rate.
  • The real rate of return is not as good as it seems. To calculate your actual profit from a term deposit, subtract the current inflation rate from the interest rate paid. For example, if inflation were running at 3% and your term deposit was paying 4%, your “real” rate of return is 1%. But don’t forget the ATO will take a portion of that, as well!
  • In order to place a term deposit, some financial institutions require you to also open a deposit account. Check the fees first! Any ongoing account-keeping fees for the account could eat up any return you earned in interest from your term deposit.

How to choose an investment term

With the official cash rate resting at a historic low of 2%, self-funded retirees might be wondering how much income they could really receive from a term deposit.

One of the main issues in choosing a term deposit is whether to invest for the short-term in the hopes that interest rates will rise, or for the long-term to lock in today’s rate in case it falls further. Unfortunately, none of us can see the future, and we don’t recommend using a crystal ball to decide which way to go.

One way to hedge your bets is to “ladder” (stagger) your investments. Laddering is a strategy where you place some of your money in a long term deposit, and the rest goes into several short term deposits that mature every month or quarter and automatically renew at the current rate. That way, you don’t “miss out” on higher rates that come up now and then, and eventually all of your money is invested in a long term deposit.

It’s a bit like singing a harmonic canon in rounds: someone is always starting the melody while another is finishing.

Advantages of laddering term deposits:

  • Average interest rates on offer tend (at this point in time) to be slightly higher over long periods of time – but not by a great deal as we are in a very low interest rate environment. With each term deposit coming up for renewal regularly, you have a chance to go elsewhere in search of a better rate.
  • It’s a structured way to invest, and it’s better than relying on a few large, but short, term deposits. You have the long-term guarantee of a certain return, which is reassuring if your retirement depends on a certain amount of income.
  • It gives you more flexibility than just putting all your savings into one big, long term deposit.

Disadvantages of laddering term deposits:

  • Some of your money is locked in for a longer time, so if you need to withdraw money unexpectedly, you can’t reach all of it.
  • You could be stuck with a low rate for a long time on the bulk of your money. 3.50% might look like a decent interest rate today, but who knows if it will be in 5 years’ time?
  • Laddering involves far more paperwork than putting all your money into one or two term deposits or a notice saver account.

Whichever strategy you choose, make sure you get a good rate of return. You can read CANSTAR’s latest Term Deposit Star Ratings Report and compare term deposit rates here.

Term deposit glossary of terms

Please note that these are a general explanation of the meaning of terms used in relation to term deposits. Your bank or financial institution may use different terms, and you should read the product disclosure statement of your policy carefully to understand everything that may apply during your investment term. You cannot rely on these terms in relation to any term deposit policy you may purchase.

Advance notice term deposit: A term deposit where the institution allows you to withdraw the money earlier than the end of the term, if you pay a penalty fee and give advance notice of 31 days. Advance notice term deposits often have a slightly higher interest rate than standard term deposits.

Basis points: A unit of measurement used in financial situations to describe the percentage change in interest rates or the value of a financial product. One basis point is 0.01%.

Cooling-off period: Defines the number of days available for the investor to change the investment term or amount of money invested in the term deposit. The number of days will be specified in the PDS and the term deposit contract.

Coupon payment: A portion of a bond, entitling the holder to receive a payment of interest. For example, a 10% coupon paid semi-annually would yield two 5% interest payments.

Debenture: A medium- to long-term investment issued by a company when you lend money to that company. In return for your investment, you receive a regular and fixed amount of interest for the term of the investment. The invested funds (principal) are repaid at the end of the term (maturity).

Interest paid: The amount of simple interest paid on the principal amount (the initial amount of money placed in the term deposit). For example, a term deposit paying 6% interest per annum would pay 6% of the sum invested at the end of a 12-month term, or 3% at the end of a 6-month term.

Laddering: A method of investing in term deposits. The investor puts some of their money in a long-term deposit and the rest in several short-term deposits that renew regularly.

Maximum term: The maximum amount of time that you can receive a certain interest rate on a term deposit.

Maturity: The time at which the term deposit will expire and stop accumulating interest. Also known as the ‘end of term’.

Minimum term: The minimum amount of time that you can receive a certain interest rate on a term deposit.

TD: Term deposit.

Term: The length of time or duration a term deposit will run for.

Term deposits: An account with a financial institution where money is deposited for a set period of time. The interest rate is usually fixed for the term of the deposit and is generally higher than a transaction account, but not always higher than some other at-call high interest savings accounts. Also known as a fixed deposit.

Yield: The rate of return earned on an investment.

Who offers term deposits in Australia?

These are the product providers we research and rate:

  1. ADCU
  2. AMP Bank
  3. ANZ
  4. Arab Bank Australia
  5. Bank Australia (formerly known as bankmecu)
  6. Bank of Melbourne
  7. Bank of Sydney
  8. BankSA
  9. BankVic
  10. Bankwest
  11. bcu
  12. Bendigo Bank
  13. Beyond Bank
  14. BOQ
  15. Cairns Penny
  16. Catalyst Money
  17. CBA Online Only
  18. Citibank
  19. Coastline Credit Union
  20. Commonwealth Bank
  21. Community First Credit Union
  22. CUA
  23. Defence Bank
  24. Delphi Bank
  25. ECU Australia
  26. Encompass Credit Union
  27. FCCS Credit Union
  28. G&C Mutual Bank
  29. Gateway Credit Union
  30. Greater Building Society
  31. Heritage Bank
  32. Holiday Coast Credit Union
  33. Horizon Credit Union
  34. HSBC
  35. Hume Bank
  36. Hunter United
  37. Illawarra Credit Union NSW
  38. IMB
  39. ING Direct
  40. Macquarie Credit Union
  41. ME Bank
  42. MyState
  43. NAB
  44. Newcastle Permanent
  45. Northern Beaches Credit Union
  46. P&N Bank
  47. People’s Choice Credit Union
  48. Police Bank
  49. Qantas Credit Union
  50. Qld Police Credit Union
  51. QT Mutual Bank
  52. Quay Credit Union
  53. Queenslanders Credit Union
  54. Rabobank Australia
  55. RaboDirect
  56. Rural Bank Ltd
  57. Rural Bank ONE
  58. SCU
  59. Select Credit Union
  60. SERVICE ONE Alliance Bank
  61. George Bank
  62. Summerland Credit Union
  63. Suncorp Bank
  64. Teachers Mutual Bank
  65. The Capricornian
  66. The Mac
  67. The Mutual
  68. The Rock Building Society
  69. Transport Mutual Credit Union
  70. UBank
  71. Unicredit WA
  72. Victoria Teachers Mutual Bank
  73. Westpac
  74. Your Credit Union

For more information on how CANSTAR rates term deposits, read our latest star ratings report.