With a term deposit, you’re locking your money away for that period, so a long-term option might be too much of a commitment for you. However many banks offer term deposits of less than a year, with common terms including 3, 6 or 9 months.
A lot of competition seems to focus on the 6 month terms, with very competitive interest rates. However you’ll need to keep in mind that interest rates are expressed on a per annum, or per year, basis.
A short-term term deposit offers interest rate certainty that you might desire versus putting your cash in an at-call savings account, in which the interest rate can fluctuate at any time.
For the purpose of comparison, ‘short term’ is defined as anything less than 12 months, and most commonly 3, 6 or 9 month terms.
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Features of short-term term deposits
Backed by $250,000 government guarantee
All bank deposits are backed by what’s called the Financial Claims Scheme, a government initiative guaranteeing deposits up to $250,000 per bank. This makes term deposits one of the safest investment options in the market.
In the unlikely event your bank goes bust, deposits up to $250,000 will eventually be recovered to you. This is also per account holder, meaning if you co-signed a term deposit with your spouse you could be covered up to half a million. Keep in mind this is per banking licence - certain banks share licences, for example UBank and NAB.
Interest payments - options to re-invest or collect interest earnings
Interest on short-term term deposits is often paid at the end of the term. However other payment types could include monthly or even fortnightly. There are often slight reductions in the overall interest rate if you opt for more frequent interest payments.
At the term’s maturity, you’ll have the option to re-invest the funds, or close the account and collect the interest if you haven’t been collecting it already. Interest is often paid into a linked transaction account - either your own external one, or one the bank has supplied for you.
Interest rate certainty without the long-term commitment
Term deposit interest is a sure thing for that period. This is unlike a savings account where the interest rate can fluctuate with the market. Locking your money away for a long period can be a big ask - a shorter term removes some of that anxiety.
Further, there often aren’t many hoops to jump through with a term deposit. You can usually come to the bank with a minimum deposit, set and forget. This is unlike many savings account where to get the best interest rates you need to meet a certain number of criteria.
Big maximum deposits
Term deposits often have much larger maximum deposits than savings accounts, often running into the millions of dollars. However you will need to keep in mind the $250,000 government guarantee mentioned earlier.
What to consider with short-term term deposits
Interest rates
Interest rates are often lower on short-term term deposits because the bank doesn’t have as long with your cash. Still, you could continue locking your money away for short periods and then re-investing the interest elsewhere.
This might be more fruitful than waiting for a year or more until you see your interest. As they say, a bird in the hand is worth two in the bush.
Early withdrawal penalties
While shorter terms aren’t as much of a commitment, they are not ‘at call’ like a savings account. If you can’t lock your money away for that period then reconsider a term deposit. Even if you break it early, you still usually need to provide 31 days' notice until you see your funds.
You will likely sacrifice a lot of interest if you break a term deposit early. Further, some banks might charge an early termination fee, which is typically about $30 or so.
Interest payments
On shorter terms you might not get as much of a choice as to how frequrntly interest is paid. ‘At maturity’ - at the end of the term - is the most common option, however you might be able to find a product with more frequent interest payments such as monthly.
Tax
As with any deposit product, interest payments are considered taxable income. If you earned $70,000 in the year from your employer and $2,000 in interest from your term deposit, you’d be taxed as if you’d earned $72,000.
