What are term deposits and how do they work?

Term deposit rates on Canstar’s database reached 5.65% in April this year–a near-three year high. And the peak may still be ahead, particularly if the RBA makes upward movements in the near future. As term deposit fever could begin heating up, it’s important those considering locking funds away in these products know what that means before diving in.

What is a term deposit?

A term deposit is a type of bank account that allows you to earn a fixed rate of interest on money locked away for a set period of time. Because the interest rate is locked in, term deposit returns won’t fluctuate with market ups and downs. Plus, unlike many high-interest savings accounts, depositors don’t need to meet ongoing conditions to earn the top rate.

The downside? Money kept in term deposits can’t be accessed until the fixed term expires, lest depositors face penalties–sometimes severe.

Many banks, including the big four, offer term deposits, with savers commonly able to deposit as little as $1,000 or as much as $1 million. Those looking to deposit more than $1 million may need to approach a bank that offers larger term deposits directly.

How does a term deposit work?

A term deposit sees you agree to lock away your money for a set period of time (typically between one month and five years). During that time, it will accrue interest at an agreed fixed rate. This rate won’t change due to economic factors, like cash rate hikes or cuts—which can affect rates on savings accounts. For this reason, term deposits generally suit people who are looking for a lower-risk investment with a certain return.

You may also be able to choose how often the interest is paid on your term deposit. Many banks allow depositors to opt for interest to be paid monthly, quarterly, annually, or at maturity (when the term deposit expires).

When the term ends, the term deposit is said to have reached ‘maturity’. At this point you may choose to withdraw your money or put it in a new term deposit (called rolling it over). The new rate you’re offered will likely reflect the interest rate environment at the time you roll it over, which may be lower than your previous rate. Some banks offer special rates to existing term deposit customers rolling over their money, but these special rates aren’t necessarily competitive.

Term deposits generally don’t attract set up or account keeping fees.

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

As a result of the three cash rate rises so far in 2026 (a total of 0.75%, bringing the cash rate to 4.35% at the time of writing), savings account rates have jumped. The rates on offer for term deposits also generally benefit from these raises and are currently higher on average than ongoing savings account rates:

Average interest rates: 1-year term deposits v ongoing savings accounts

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Source: www.canstar.com.au – 3/06/2026. Based on personal, non-compounding term deposits on Canstar’s database. All payment frequencies are considered.

Most term deposits earn simple interest, meaning you only earn interest on your initial investment. Most savings accounts, on the other hand, earn compound interest, letting you earn interest on interest.

For example, if you had $50,000 in a one-year term deposit with an interest rate of 5.00%, you’d likely earn $2,500 in interest over the year – $58 less than if you had the same amount in a savings account with the same ongoing interest rate, where interest earned each month can compound. That said, savings account rates can change, whereas a term deposit’s rate won’t shift during its term.

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.”

What impacts rates on term deposits?

Generally, the term of your deposit will impact the interest rate on offer. That’s because term deposit rates tend to reflect the economic outlook at a particular time. For instance, if the cash rate is expected to climb in the near term but fall thereafter, rates on shorter deposits might be higher than on longer ones.

How often a term deposit pays interest can also impact the rate on offer. Some banks offer lower rates on term deposits that pay interest more often, with the highest rates reserved for deposits paying interest annually or at maturity.

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

Types of savers and what might be right for them

• Savers who want to deposit a set amount and don’t need to access their funds may favour term deposits. The highest term deposit rate for a 12-month term at the time of writing is 5.50%, compared to the highest non-aged based ongoing savings rate of 5.10%. Over a year, you’d earn $140 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 penalty. Those turning to a savings account should beware of bonus interest rate conditions, though. If you fail to meet bonus conditions in a particular month, perhaps by making a withdrawal or not growing your balance, the interest rate may drop significantly. For example, one of the highest bonus savings account rates of 5.50% 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 5.65%, which is 0.55% higher than the top ongoing savings interest rate.

Compare High-Interest Savings Accounts

Difference between term deposits and savings accounts

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How to compare term deposits

There’s several things to think about when comparing term deposits and the best option for you will depend on your financial habits and circumstances. Here are some of the key aspects worth considering:

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

• The frequency of interest payments
  

• The ideal term for your term deposit
  

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

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

• If there’s an automatic rollover option
  

• 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 rates for 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.

Compare Term Deposits

What are the benefits of a term deposit?

One of the main 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 you’ll earn. Another benefit is that they can represent a relatively safe investment, as returns on other forms of investment like property or shares can be more volatile.

Additionally, deposits made at authorised deposit-taking institutions (ADIs) like banks, credit unions, and financial institutions are guaranteed by the Australian Government’s Financial Claims Scheme (FCS) for up to $250,000. This means each individual deposit-holder will be reimbursed up to $250,000 if a financial institution fails.

Common traps to avoid with term deposits

• Early withdrawal: Most term deposits will penalise you if you withdraw your funds before maturity, and these penalties can be severe. You may also have to give the financial institution 31 days notice before withdrawing your funds.

• 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 rise during the term of your deposit, you could find yourself missing out on a better deal. This presents a particular risk for longer terms.

• Inflation risk: Inflation refers to the price of goods and services increasing over a period of time. If inflation rises substantially during the term of your deposit, your funds, plus interest returns, may not be worth as much when they reach maturity than when you initially deposited them. 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 locking a lump sum of $50,000 into a single five-year term deposit, you could split it, depositing $10,000 across five separate accounts with terms ranging from one to five years. As each term matures, you can either withdraw the cash or reinvest it into a new term. This may help if you have both short and long-term financial goals and 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, it’s 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 deposit 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—ANZ, CommBank, NAB, and Westpac—and many other banks and credit unions.

Importantly, only registered banks can offer term deposits. If an institution isn’t on the Australian Prudential Regulation Authority’s list of ADIs, then anything offered by them isn’t a term deposit and won’t be covered by the FSC.

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

Can I lose money with a term deposit?

Term deposits are considered a safe deposit product, although you may not earn as much from a term deposit as you might by pursuing investment strategies like online share trading or purchasing ETFs.

If safety is your main concern, you might be glad to know term deposits are protected under the FCS, which means the Federal Government will reimburse deposit holders up to a set amount if a licensed bank collapses. Up to $250,000 of deposits, per account holder, per ADI, are protected under the FCS.

However, APRA warns some banks, building societies, and credit unions operate multiple businesses under the same banking licence. For example, Westpac’s banking licence stretches over Bank of Melbourne, BankSA, and St George Bank too. If you have deposits—including term deposits—with multiple banks operating under the same licence and they all collapse, you’ll 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 of a particular bank.

Once you’ve decided how much you want to deposit, at a set interest rate, you can usually simply fill in an online application form or head into a local branch if one is available.