What is a Term Deposit?

Term deposits offer a reliable and straightforward solution for Australians looking to save money with minimal risk and maximum predictability.

They are especially appealing in uncertain financial climates or for those who find it challenging to resist dipping into their savings. A term deposit allows you to invest a set amount of money for a specific period and earn a guaranteed rate of interest.

Once your money is locked away, it’s out of reach—this can help you stick to your savings goals without the temptation of spontaneous withdrawals.

Whether you’re saving for a home, planning a dream holiday, or just building a solid financial buffer, understanding how term deposits work is crucial to making informed decisions.

In this guide, we’ll explore the mechanics of term deposits, how they differ from other types of accounts, and how to open one in Australia.

What Is a Term Deposit?

A term deposit is a fixed investment offered by banks, credit unions, and other authorised financial institutions. You agree to deposit a specific sum of money for a predetermined length of time—this could be as short as one month or as long as five years. In return, the institution offers you a fixed interest rate that is agreed upon upfront.

The primary feature of a term deposit is that the money is “locked in” for the entire term. This means that once you invest, you won’t be able to access your funds until the maturity date without incurring penalties.

The key advantage of this arrangement is that you’ll receive a guaranteed return. You know exactly how much interest you will earn over the life of the deposit, regardless of changes in market interest rates.

How Term Deposits Work

When you open a term deposit, you decide on three essential components: the amount of money to invest, the length of the term, and how often you want to receive interest payments. Once these details are set, your funds are transferred into the deposit account, and the term officially begins.

Your deposit will then earn interest at the fixed rate offered by the provider. Depending on the financial institution, you may have the option of receiving your interest monthly, quarterly, annually, or only at the end of the term.

The total return will vary slightly depending on the frequency of these interest payments—more frequent payments may result in a slightly lower interest rate.

It’s worth noting that most term deposits require a minimum deposit amount, commonly around $5,000, though some institutions accept smaller amounts.

Throughout the term, your funds are inaccessible unless you request an early withdrawal, which may incur penalties and require notice, typically 31 days in advance.

How a Term Deposit Differs from a Savings Account

While both term deposits and savings accounts help people save money and earn interest, their core structures are quite different. Term deposits focus on long-term discipline and fixed returns. In contrast, savings accounts offer more flexibility, allowing you to deposit and withdraw funds at any time.

The trade-off, however, is that the interest rate on savings accounts is usually variable, meaning it can go up or down depending on market conditions and the financial institution’s policies.

A term deposit doesn’t allow for top-ups. Once it’s set, the amount can’t be increased or decreased. With a savings account, you can contribute money regularly and access it whenever you like.

While this accessibility is helpful in emergencies, it also increases spending temptation. A term deposit removes this temptation by limiting access to the funds.

Another significant difference lies in interest rate movement. If interest rates rise during the term of your deposit, you won’t benefit from the higher rates until your current term ends.

Conversely, if rates drop, your term deposit will remain locked at the higher rate you initially agreed upon, protecting you from market downturns.

Term Deposit Pros and Cons

Term deposits come with a variety of benefits that make them appealing to many Australians, especially those looking for financial stability and a guaranteed return.

However, there are also some drawbacks to be aware of, particularly for those who might need more flexibility or access to higher returns in a changing market.

Pros

• Guaranteed Returns: You earn a fixed rate of interest over the term, so you know exactly how much you’ll receive at maturity.
• Security: Deposits up to $250,000 per person, per institution, are protected under the Australian Government’s Financial Claims Scheme.
• No Market Volatility: Your return is unaffected by fluctuations in interest rates or the financial markets.
• No Setup or Monthly Fees: Most providers do not charge account maintenance or setup fees.
• Discourages Impulse Spending: Since the funds are locked in, you’re less likely to dip into your savings prematurely.
• Easy to Manage: Once opened, term deposits require minimal monitoring, making them a “set-and-forget” savings tool.

Cons

• Limited Access to Funds: Withdrawing money before the maturity date often incurs penalties and requires 31 days’ notice.
• No Benefit from Rising Rates: If market interest rates go up during your term, your deposit remains locked at the original, lower rate.
• Inflation Risk: If inflation rises faster than your term deposit rate, the real value of your return may decrease over time.
• Inflexibility: You cannot add more money to an existing term deposit once it’s opened.
• Potential Rollover Risks: If you don’t act at maturity, your funds may be automatically reinvested into a new term deposit with different (possibly lower) terms.
• Lower Returns Compared to Other Investments: While low-risk, term deposits generally offer lower returns than investments like shares or property.

How Is Interest Paid?

One of the features that borrowers often overlook is how and when interest is paid on a term deposit. Different providers offer different payment frequencies, and your choice can affect the total return on your investment.

Some term deposits pay interest monthly, while others offer quarterly, half-yearly, or annual payments. In many cases, interest is paid at maturity, especially for shorter terms.

The frequency you choose can influence the interest rate offered. Generally speaking, receiving interest less frequently, such as annually or at maturity, may yield a higher overall rate compared to monthly payments.

Interest payments can usually be directed to a nominated transaction account, either with the same provider or with a different bank. Be aware of any conditions attached to linked accounts, such as potential account fees or minimum balance requirements.

What Happens at the End of the Term?

When your term deposit reaches maturity, the financial institution will notify you. At this point, you have several options. You can choose to reinvest your funds into a new term deposit, either with or without the interest earned. Alternatively, you can withdraw the total amount—your original deposit plus any interest accrued.

Many banks offer automatic rollover into a new term deposit if you don’t respond in time. While convenient, this can be risky if the new interest rate is lower than what’s available elsewhere.

Therefore, it’s important to review your term deposit shortly before it matures—ideally about a month in advance. This gives you time to compare rates, explore other options, and make an informed decision.

How Do You Open a Term Deposit in Australia?

Opening a term deposit in Australia is a relatively simple process and can often be done entirely online. Once you’ve decided on the amount, the term, and the interest payment frequency, most banks and financial institutions will allow you to open a term deposit through their website or mobile banking app.

You’ll typically need to provide proof of identity, such as a driver’s licence or passport, and details of the account from which the deposit will be funded. Some banks also allow you to open a term deposit over the phone or in person at a branch.

Before proceeding, make sure to read the terms and conditions carefully. Pay attention to early withdrawal policies, interest rate structures, and any associated account requirements.

Banks That Offer Term Deposits in Australia

Numerous financial institutions in Australia offer term deposits. These include the “big four” banks—Commonwealth Bank, Westpac, ANZ, and NAB—as well as smaller banks, credit unions, and online-only institutions. Each provider offers different interest rates, terms, and conditions, so it’s essential to shop around.

Some institutions may offer promotional interest rates or added features such as the ability to choose your interest payment frequency. Online banks like ING and UBank often provide competitive rates due to lower overhead costs, while regional banks and credit unions may offer more personalised service.

Always ensure the institution is listed as an authorised deposit-taking institution (ADI) by the Australian Prudential Regulation Authority (APRA). This ensures your deposit is covered by the government guarantee under the Financial Claims Scheme.

Conclusion

Term deposits remain a popular savings option in Australia for good reason. They offer fixed returns, a high level of security, and help individuals stay disciplined with their savings goals.

Whether you’re saving for a large purchase, building a nest egg, or simply looking for a secure place to park your money, term deposits can provide a reliable path forward.

However, they aren’t for everyone. If you anticipate needing access to your funds or prefer a more flexible savings solution, a term deposit might not be the right fit.

Likewise, if you’re looking to maximise returns and are willing to accept some risk, investing in shares or property may yield higher gains over the long term.

In the end, choosing a term deposit comes down to your personal financial goals, risk tolerance, and the amount of money you can comfortably set aside for a fixed period. As always, it’s wise to compare rates, read the fine print, and seek independent financial advice if needed.

With the right planning and a clear understanding of how term deposits work, you can make the most of this safe and structured investment option.