Term Deposits Vs Online Savings Accounts

Term deposit or online savings account? Canstar looks at the pros and cons of each, as well as the interest rates available.

If you have a savings goal in mind to buy that new car or to save a deposit to buy a home, then there is more than one way of reaching it. For example, you can consider trying either a term deposit or an online savings account.

While there are pros and cons to both, one might better suit your particular needs. Canstar has reviewed the pros and cons, the interest rates, and the fees attached to both, to help you decide which one you should go for.

Term deposit pros and cons

Term deposits remain an ever-popular option among would-be savers, despite the record low cash rate and current inflation levels. Term deposits provide a greater level of certainty in terms of the rate of interest that you will earn. They are also the easier option and are relatively low maintenance; all you have to do is wait for your investment to mature and instruct your institution what to do with your money at the end of the period.

Based on 1,100 unique interest rates in the Canstar database, the current interest rates for term deposits are as follows:

Current term deposit rates – Min, Max and Average
Term Min  Max  Average
30 days (1 month)          0.80%           2.30%            1.62%
60 days (2 months)          1.40%           2.40%            1.76%
90 days (3 months)          1.50%           2.60%            2.22%
180 days (6 months)          1.50%           2.80%            2.32%
270 days (9 months)          1.50%           2.75%            2.21%
1 Year          1.85%           2.90%            2.50%
2 Year          1.50%           3.10%            2.62%
3 Year          1.50%           3.20%            2.72%
4 Year          1.50%           3.01%            2.73%
5 Year          1.50%           3.30%            2.80%
Source: www.canstar.com.au

Based on term deposit rates on the Canstar database and an investment amount of $25,000. Data accurate as of 24 July 2017.

Term deposits have the following pros and cons:

Pros:

  • Interest rate certainty regardless of any rate falls
  • Your savings are locked away, which can help save you from the temptation to spend
  • Low maintenance
  • No or low fees unless you decide to withdraw your money early

Cons:

  • Interest rate on deposit can’t increase if rates available in the market increase
  • Penalties and/or notice usually apply if you need to access your money before the term deposit matures
  • Minimum deposit is required – often at least $1,000-$2,000
  • No bonus interest or extra deposits available during the term until maturity
  • Less flexibility in general, compared to online savings accounts

Compare Term Deposits

Online savings account pros and cons

Online banking is now used by over 90% of Australian banking customers, according to a Canstar Blue survey, and many savings accounts are available online only.

If you are considering an online savings account, check out our comparison table below which features our highest star rated products available for the everyday saver in NSW. Please note that this table is sorted by star rating (highest to lowest) with links direct to the providers website.

Online savings accounts have the following pros and cons:

Pros:

  • Mobile banking can offer faster and more convenient access to your accounts
  • The money is usually available for you to use at any time
  • Often no minimum deposit is required, while some accounts only require a small opening deposit
  • Earns compound interest

Cons:

  • There is uncertainty about how rates will perform in the future
  • Banks can change your rates
  • You could be tempted to take money out, which can result in penalties and fees
  • Often requires you to have a linked transaction account with the institution in order to earn the bonus rates

Compare Savings Accounts

Term deposits vs online savings accounts

Before getting into the real meat of this comparison, we’ll briefly summarise the pros and cons of each method:

Pros Cons
Term deposits
  • Interest rate certainty
  • No or low fees
  • Low maintenance
  • No temptation to spend
  • Rates are locked in
  • Penalties for accessing money
  • $1,000 minimum deposit
  • Less flexibility
  • No bonus interest or extra deposits
Online savings accounts
  • Mobile banking
  • Higher interest rates
  • Money easily available
  • No minimum deposits
  • Compounding interest
  • Rate uncertainty
  • May require you to have a linked transaction account with the institution in order to earn the bonus rates
  • Temptation to spend your money

Interest rates on term deposits vs online savings accounts

It’s important to compare the interest rates available on different online savings accounts. While savings accounts often advertise a  higher total interest rate, the base rate (paid regardless of any conditions that may exist) onlineonly savings accounts generally do not.

Online-only savings accounts are referred to as Flexible Saver accounts within Canstar’s Savings and Transaction Account Star Ratings. They are compared based on the rate that you will receive on your balance, while recognising the flexibility required by these types of savers. These are the type of savings accounts that we’ll be comparing with term deposits.

  Term Deposits Online Saver
3 month 6 month 12 month Base Rate
Minimum 1.50% 1.50% 1.50% 1.00%
Maximum 2.75% 2.85% 3.00% 2.40%
Average 2.21% 2.31% 2.50% 1.54%
Source: www.canstar.com.au

Rates as at 15 June 2017. Based on term deposits considered from providers eligible for the Canstar Term Deposit Award that pay at the end-of-term and online savers considered in the Canstar Savings and Transaction Account Star Ratings. Based on a balance of $50,000.

As you can see in the table above, term deposits can offer higher interest rates than online Flexible Saver accounts.

However, if you are willing to be proactive with your saving, meeting certain conditions along the way, it is possible to earn a higher interest rate if you look for a bonus saver account (referred to by Canstar as a Regular Saver).

This is why it’s a good idea to compare your options and consider your circumstances when deciding where to put your savings.

Compare Term Deposits

Compare Online Savings Accounts

Earning interest: Term deposits vs online savings accounts

The term deposits in the example above are non-compounding, with payment being made at the end of the term. This means the interest you receive will be ‘pro-rated’.

Online savers, on the other hand, typically pay interest monthly, which allows for the effects of compound interest. The below table outlines estimated earnings, assuming the account (or term deposit) has no fees, no interest rate changes occur, and no transactions are made over the relevant periods, using the highest available rates:

Total Balance Plus Interest Earned
  Term Deposit Online Saver
3 months $50,344 $50,301
6 months $50,713 $50,603
12 months $51,500 $51,213
Source: www.canstar.com.au

Highest available rates as at 15 June 2017. Only base rates considered for online savings accounts. Based on a $50,000 deposit with interest paid at the end-of-term for term deposits and monthly for online savers. Assumes no fees and charges and no transactions during the term.

Despite the lower rates on online savers, the end results are slightly closer, thanks to the effects of compound interest. However, in general, in this scenario, term deposits do come out ahead for 3-month, 6-month, and 12-month timeframes.

Compare Term Deposits

Terms on term deposits vs savings accounts

Term deposits have a large range of terms available. These deposit terms range all the way from 1 month up to 5 years, and an extensive range of options in between, which can be seen in the tables above. A high-rated institution should offer a wide range of term lengths to cater to different consumer needs.

Shorter terms could be a suitable choice for people who don’t want to miss out on an interest rate rise. At the other end of the scale, longer term deposit terms of 2-5 years are ideal for people who would prefer to keep their money tucked away and potentially make larger savings over time.

According to our article on the current term deposit environment, anything up to 2 years is popular, but 5-7 months is the most common term deposit term length for visitors to our site.

Savings accounts, however, do not technically have ‘terms’. They go on indefinitely, which might be appealing if you prefer your savings options to be low maintenance.

With online savings acocunts, you can meet the minimum deposit requirements automatically by setting up a direct recurring deposit. So your online savings account can keep earning interest for as long as you want it to as long as you continue to meet the conditions.

Fees on savings accounts vs term deposits

Savings accounts can have more fees than term deposits, with common fees charged on these accounts including:

  • Monthly account-keeping fees
  • Electronic transaction fees
  • ATM withdrawal fees
  • Branch deposit fees

Since Flexible Saver accounts are usually online only, most of these fees, such as branch deposit fees, don’t apply. The most typical fee that you may find charged on your online savings accounts is a monthly account fee, but with the right amount of research, finding an account without account keeping fees should not be a difficult exercise.

Most term deposit accounts don’t have any setup or ongoing account fees. One fee that does tend to sting people is the penalty fee that applies if you withdraw your money prior to the end of the term.

The penalty for breaking your agreement can be quite heavy, so you should always check this with your provider before agreeing to the term deposit. Some institutions might take a percentage off your interest rate instead of charging a penalty. For example, if you were earning an interest rate of 5% and the penalty rate is 2%, then you would only earn 3% on the remaining money in your term deposit.

However, you may be able to avoid this if you give your financial institution sufficient warning that you plan to withdraw your money early.

Whichever option you take, you can expect to avoid hefty fees, so long as you understand the product that you sign up for and show some care in how you use the account or term deposit.

Final verdict

While each option has its merits, term deposits vs online savings accounts is really a question that comes down to your individual needs and circumstances.

While it is often possible to lock in a higher rate for a term deposit than on offer for online savers, the trade-off is that you could miss out on future rate increases and your savings will not be available at call, should an emergency pop up..

Term deposits are popular with investors who prefer to receive a set return, and this is exactly what you get – you don’t have to worry about fluctuating interest rates like you would with online savings accounts.

Once you’ve made your choice between term deposits or online savings accounts, Canstar can help you compare what’s out there to find the right product for your situation:

Compare Term Deposits

Compare Online Savings Accounts

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