What are term deposits and how do they work?

A term deposit lets you invest a set amount of your money for a fixed period of time to help you build up your savings. So how does a term deposit work and what features should you look for?

Source: fizkes/Shutterstock.com

A term deposit lets you invest a set amount of your money for a fixed period of time to help you build up your savings. So how does a term deposit work and what features should you look for?

Key points:

You can invest anything from a $1,000 to more than $1m with a term deposit
You may find a higher interest rate with a term deposit than you would with a savings account for larger amounts
Penalties may apply if you access your money before your term deposit matures

With a term deposit, you can invest anything from as little as $1,000 at some financial institutions to more than $1m in some cases. Your money is invested at an agreed interest rate for a fixed period of time, or term, usually between one month and up to five years.

You should usually only access your money at the end of the term, known as maturity, to take full advantage of the agreed term deposit rate. Any attempt to access your money earlier than maturity may incur a penalty.

One of the advantages of term deposits is that most come with no set up or account fees, according to the Australian Government’s Moneysmart website.

That’s why term deposits generally suit people who are looking for a lower-risk investment with a certainty of return.

There has been a shift towards investment in term deposits – away from easy access savings – as interest rates have been rising since May 2022, according to the Reserve Bank of Australia (RBA).

Compare Term Deposits

How does a term deposit work?

With a term deposit you agree to lock away your money for a set period of time where it will accrue interest at the agreed term deposit rate.

You may find that you can access a higher rate of interest than you would if the money was in an everyday savings account (without bonus interest) where you still have easy access to your money, particularly when it comes to larger sums and longer terms.

Moneysmart says that generally, the longer the term of your deposit, the higher the interest rate, although this may not always be the case. You should check carefully the various term deposit rates offered by each institution when considering any investment. Some longer term deposit rates can be lower than mid-term investments.

You may 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.

Look carefully though 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 can use Canstar’s term deposit calculator to get an idea of how much interest you can expect on your term deposit, based on the amount you invest, the term, and the term deposit rate. Some institutions offer their own term deposit calculator on their website.

When the term ends (for example, at the end of its 12-month term), it is said to have 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.

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 will know exactly how much interest you will earn. Another benefit of term deposits is that they can represent a relatively safe investment – other investment areas like property or the share market can be more volatile, whereas a term deposit is more stable. Additionally, deposits made at authorised deposit-taking institutions (ADIs) are guaranteed by the Australian government up to $250,000, to provide a further peace of mind.

What are the downsides of term deposits?

The key downside of term deposit is that when you deposit your money in one, you are effectively locking that money away for a set period of time, meaning that you will not have ready access to it, should you find yourself in need of cash. It is possible to break out of a term deposit early, but depending on the financial institution, there is likely to be a fee involved or an adjustment made to any interest you’ve earned. Additionally, it’s likely you will need to give notice of up to 31 days before accessing your money early.

Who offers term deposits?

Term deposits are offered by many ADIs in Australia, including the big four banks – CommBank, Westpac, ANZ and NAB – 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 Moneysmart, anything offered by them is not a term deposit and will not be covered by the financial claims scheme (FSC). The FSC guarantees to pay eligible account holders up to $250,000 to replace any deposits in the unlikely event your bank, credit union or building society fails.

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

When considering any term deposit investment you should read carefully the Target Market Determination (TMD) and other relevant documents to see if it’s right for you. You might consider seeking some independent financial advice.

Frequently Asked Questions about Term Deposits

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.

Again, remember to check carefully to see how the term deposit rate varies with the term duration: a longer investment doesn’t always mean a higher interest rate.

Compare term deposits

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.

Remember, that deposits of up to a total of $250,000 per account holder, per institution offered by an ADI in Australia are protected under the financial claims scheme. That includes any term deposits you have with a listed institution.

But APRA warns that some banks, building societies or credit unions may operate multiple banking businesses with different trading names under the same banking licence. If you’ve multiple deposits – including term deposits – in businesses operating under the same licence you will only be covered up to a total of $250,000.

There are several features you should consider when looking to compare term deposits. They include:

the interest rates on offer for different terms
the ideal term for your term deposit
how easy it is to open up a term deposit
if a maturity reminder is provided and how it’s delivered
if there’s an automatic rollover option for the term deposit
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

Whether you’re considering a term deposit as a conservative investment option or as part of a wider investment mix, you may like to consider seeking professional financial advice before making any decision.

You can find out more about what to look out for with free financial advice, as well as about independent financial advisers and planners in Australia.

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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Cover image source: fizkes/Shutterstock.com

This article was reviewed by our Editor-in-Chief Nina Rinella before it was updated, as part of our fact-checking process.

Alasdair Duncan

Content Editor

Alasdair Duncan is Canstar's Content Editor, specialising in home loans, property and lifestyle topics. He has written more than 500 articles for Canstar and his work is widely referenced by other publishers and media outlets, including Yahoo Finance, The New Daily, The Motley Fool and Sky News. He has featured as a guest author for property website homely.com.au.

In his more than 15 years working in the media, Alasdair has written for a broad range of publications. Before joining Canstar, he was a News Editor at Pedestrian.TV, part of Australia’s leading youth media group. His work has also appeared on ABC News, Junkee, Rolling Stone, Kotaku, the Sydney Star Observer and The Brag. He has a Bachelor of Laws (Honours) and a Bachelor of Arts with a major in Journalism from the University of Queensland.

When he is not writing about finance for Canstar, Alasdair can probably be found at the beach with his two dogs or listening to podcasts about pop music. You can follow Alasdair on LinkedIn.