What are term deposits and how do they work?

What is a term deposit?

A term deposit is a type of bank account that allows you to earn interest on a locked away amount of money over a set period of time. Many financial institutions offer term deposits, including the big four banks. You can invest from as little as $1,000 to more than $1 million in some cases.

How does a term deposit work?

With a term deposit you agree to lock away your money for a set period of time (typically between one month and five years) where it will accrue interest at an agreed fixed rate. This rate cannot change due to economic factors such as the raising or lowering of the cash rate—which often affects the rates offered by savings account providers. This is why term deposits generally suit people who are looking for a lower-risk investment with a certain return.

Generally speaking, the longer the term of your deposit, the higher the interest rate, although this may not always be the case. Check the various term deposit rates offered by each financial institution when considering any investment, as some longer term rates (i.e. one to five years) can be lower than mid-term ones (i.e. six to nine months). Look carefully at the per annum (p.a.) interest rate you’re offered to see if it makes any difference to the amount of the final interest payment.

You may find that you can access a higher rate of interest with a term deposit than you would if the money was in a savings account (without bonus interest).You may also be able to select how frequently the interest is paid on your term deposit. For example, you may be able to opt for the interest to be paid monthly, quarterly, every 12 months or at maturity, depending on the length of your term. Most term deposits also come with no set up or account keeping fees.

You can use Canstar’s term deposit calculator to get an idea of how much interest you can expect to earn on your term deposit, based on the amount you invest, the term and the interest rate.

When the term ends, it’s said that the term deposit has reached ‘maturity’. At this point, you may choose to access your money or opt to reinvest (or rollover) some, or all, of the amount into a new term deposit.

Term deposit vs savings account: how do returns compare right now?

As a result of the three cuts to the cash rate in 2025 (to a total of 0.75%), savings account rates have dropped throughout the year. The rates on offer for term deposits also generally fall victim to these cuts, but still remain higher on average than ongoing savings account rates, as shown below:

Average interest rates

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Source: www.canstar.com.au – 26/11/2025. Based on personal, non-compounding term deposits and savings accounts on Canstar’s database. All payment frequencies are considered. Age-restricted accounts are excluded.

That being said, most term deposits earn simple interest (i.e. you only earn interest on the amount deposited) compared to savings accounts which earn compound interest (i.e. you can earn interest on the interest payments you’ve already received). For example, if you had $50,000 in a one-year term deposit with an interest rate of 4.25%, you’d earn $42 less over the year than if you had the same amount in a savings account with the same ongoing interest rate.

Canstar’s Data Insights Director, Sally Tindall, says “whether a term deposit or a savings account will work better for you will depend on how much you have in savings, how regularly you spend and save and your financial goals.”

Ms. Tindall also notes that “you can have both a savings account and a term deposit or you could have multiples of both—if that’s going to work in your favour.”

Types of savers and what might be right for them

• Savers who want to deposit a set amount and don’t need access to the funds may favour term deposits. The highest term deposit rate for a six month term at the time of writing is 4.40%, compared to the highest non-aged based ongoing savings rate of 4.25%. In six months, you’d earn $28.05 more on a $50k term deposit.

• Savers who want flexibility may prefer a savings account with a high ongoing interest rate, as you’re generally unable to access the funds in a term deposit without incurring a fee or interest rate reduction. Beware of savings accounts with bonus interest rate conditions as well. If you fail to meet the conditions for a particular month (i.e. you make a withdrawal or do not grow your balance), the interest rate could drop significantly (i.e. one of the highest bonus savings account rates of 4.75% drops to a measly 0.01% if conditions aren’t met).

• Savers who can actively meet conditions each month may favour a savings account with a bonus interest rate. The highest non-aged based bonus interest rate is 4.75%, which is 0.50% higher than the top ongoing savings interest rate. But to earn this rate, you’d need to deposit $1,000, grow your balance and make five eligible card transactions per month.

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Difference between term deposits and savings accounts

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How to compare term deposits

There are several features you should consider when comparing term deposits:

• The interest rates on offer for different terms and deposit amounts

• The frequency of interest payments (i.e. monthly, quarterly, annually or at maturity)

• Whether the term deposit pays simple or compound interest

• The ideal term for your term deposit

• How easy it is to open up a term deposit with a particular provider

• Whether the bank or financial institution offers loyalty bonuses or better rates for existing customers

• If a reminder that your term deposit is about to reach maturity is provided and how it’s delivered

• If there’s an automatic rollover option

• How many days you’ll have to make amendments and add funds to the term deposit

• Any fees or penalties for early access to your term deposit before maturity

You can also compare term deposits with Canstar, including those with the highest five to seven month terms. Read the Product Disclosure Statement (PDS) and Target Market Determination (TMD) for any term deposit product you’re considering.
Whether you’re considering a term deposit as a conservative investment option or as part of a wider mix of investments, you may also like to consider seeking professional financial advice before making any decision.

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What are the benefits of a term deposit?

One of the benefits of a term deposit is certainty. When you put money into one, you know the interest rate up front, which means you’ll know exactly how much interest you’ll earn. Another benefit of term deposits is that they can represent a relatively safe investment, as other investment opportunities like property or the share market can be more volatile.

Additionally, deposits made at authorised deposit-taking institutions (ADIs) (i.e. banks, credit unions and financial institutions) are guaranteed by the Australian Government’s Financial Claims Scheme (FCS) for up to $250,000. This means you’ll be reimbursed up to $250,000 if the financial institution goes bankrupt.

Common traps to avoid with term deposits

• Early withdrawal: Most term deposits will penalise you, either through a fee or a loss of interest, if you withdraw your funds before maturity. You may also have to give the financial institution 31 days notice before doing so.

• Automatic rollover: “While you may want to keep your term deposit going after it reaches maturity, beware that some providers may offer you a lower rate to do so. If you automatically rollover the funds without checking this, your hard-earned savings may be reinvested at an uncompetitive rate,” says Ms. Tindall.

• Missing out on better rates: If interest rates are rising during the term of your deposit, you could be missing out on a better deal. This can be especially true for longer terms (i.e. one to five years).

• Inflation risk: Inflation refers to the price of goods and services increasing over a period of time. If the levels of inflation are high (such as the recent peak of 7.8% in the December 2022 quarter) then your term deposit, even with its interest returns, may not be worth as much when it reaches maturity then when you initially deposited the money. Inflation is a risk worth considering with longer terms especially.

Term deposit tips from our experts

• Laddering your deposits: Ms. Tindall suggests considering the laddering strategy, as it could give you flexibility in the way your money is deposited while still earning you a return. For example, instead of depositing $50,000 into a five-year term deposit, you could instead deposit $10,000 into a one, two, three, four and five-year term deposit. As each reaches maturity, you can then decide to withdraw the funds or reinvest them in another term deposit. This may help if you have both short and long-term financial goals, as well as protect you from inflation risks.

• Shop around for a competitive interest rate: “If your money isn’t earning interest at a rate that’s above inflation, your money is actually going backwards,” says Ms. Tindall. You can use Canstar’s comparison tables to compare different interest rates and terms to find one that’s competitive, while also meeting your needs.

• Setting reminders: Setting yourself reminders on when a term deposit is about to reach maturity can ensure that you’re not blindsided by an automatic rollover at a lower rate. This can also give you time to review the rates currently available on the market.

• Using several different investment approaches: If you don’t want to lock away all of your savings in a term deposit, you could consider using a variety of investment options, such as pairing a term deposit with a high interest savings account. This way you can still access a portion of your funds when you need them without being penalised.

• Read the fine print: As with any financial product, it’s best to read the fine print before signing up. That way there’s no hidden surprises when your term deposit reaches maturity.

Who offers term deposits?

Term deposits are offered by many financial institutions in Australia, including the big four banks—ANZ, CommBank, NAB and Westpac—as well as many other banks, credit unions and financial providers.

If the ADI is not on the Australian Prudential Regulation Authority’s list, then according to the Federal Government’s Moneysmart website, anything offered by them is not a term deposit and will not be covered by the FSC.

If you’re interested in investing in a term deposit you might want to consider the financial institutions Canstar recognises as offering outstanding value across rates, terms and product features in our annual Term Deposit Awards.

What are the interest rates on a term deposit?

The interest rates available on a term deposit can vary depending on the provider, the amount you’re investing and the term you’re considering. Some institutions may even offer a bonus on the interest rate if you already hold an account with them (i.e. transaction account, savings account, home loan etc.).

Can I lose money with a term deposit?

Term deposits are considered a safe investment, although you may not earn as much interest from a term deposit as you might by pursuing some alternative investment strategies, such as online share trading or ETFs.
Deposits of up to a total of $250,000 per account holder, per ADI are protected under the FCS in Australia. But APRA warns that some banks, building societies or credit unions may operate multiple businesses with different trading names under the same banking licence (e.g. Westpac runs Bank of Melbourne, BankSA and St George Bank under the same licence). If you have multiple deposits—including term deposits—in businesses operating under the same licence you’ll only be covered up to a total of $250,000.

How do I apply for a term deposit?

You can apply for a term deposit in much the same way as you’d apply for a normal bank account. The process may be simpler if you’re already an existing customer with the institution offering the term deposit you’re interested in.
Once you’ve decided how much money you want to invest, at a set term deposit rate, you can usually complete an application form online. Or you can head into a local branch office if one is available.

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