You may have heard of a term deposit before now, but do you really know how they work? Find out exactly how they work, how the interest is calculated and how comparing offers with Savvy can help you ensure your savings work harder for you. Start comparing different term deposits from around Australia with Savvy today.
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A term deposit is an agreement to lock away a fixed sum of money for a set period in return for generous interest. They’re offered by many banks and financial institutions and are suitable for people who want a zero-risk passive investment and don’t mind locking up their money for an extended period.
Term deposits are commonly offered for between one month and five years, although these terms vary between the various financial institutions. Some offer terms in days (such as 90 or 180 days) whilst others talk in terms of months and years (such as three months, six months and two years). The minimum deposit requirements also vary between $1,000 right up to $10,000 or more depending on the institution.
In return for agreeing to stash your savings away where you can’t access them for a set period, you’ll be offered an attractive interest rate. In general, you’ll be able to secure a higher interest rate for a longer term deposit. For instance, in June 2022, the best short-term deposit interest rates for deposits of six months range from 0.4% p.a. up to 2.10% p.a. (the latter of which is offered by AMP Bank). For longer-term deposits of two years, interest rates can vary from around 0.6% p.a. right up to 3.6% p.a.
Savvy can help you compare term deposits and interest rates, offering clear and easy-to-understand comparison information free of charge across a range of offers. Start comparing interest rates with Savvy today to see how much your nest-egg could earn you.
There are several ways you can find the best interest rates offered on term deposits, including:
Interest is calculated on term deposits according to simple interest principles. The formula for simple interest is:
Interest = principal sum x interest rate (as a decimal) x time period divided by 100
So, for example, if you’re offered a 2% interest rate on a one-year term deposit of $5,000, the interest calculation would look like:
$5,000 x 0.02 x 1 year = $100
To make things simpler, though, you can use Savvy’s term deposit calculator to work out how much interest you’ll earn and compare the various rates you can receive on the best short-term deposits.
You can choose to receive your interest either monthly, quarterly, annually, or at maturity, which means at the end of your term deposit. If you opt to receive your interest either annually or at maturity, you may be offered a slightly higher interest rate to compensate for the lack of compounding.
However, earning a slightly higher interest rate may not compensate you fully for receiving your interest less often. The following example of a $10,000 term deposit invested for two years shows that:
These results show that you’d be $2.42 worse off with interest paid annually than if you receive a slightly lower rate of interest but have it compounded monthly. Although this is only a very minor difference, it could be larger if the sum you have to invest is much higher or the interest disparity is greater. For this reason, it’s important to compare term deposits regularly to make sure you’re still getting the best interest rate possible, which you can do with Savvy.
You’ll know exactly how much interest your investment will earn you and you can budget and count on receiving this money.
Forced discipline to leave savings alone
A term deposit forces you to leave your savings in place and resist the urge to splurge on those tempting sales.
No flexibility to increase savings
You have to agree to take out a term deposit for a set sum of money, so there’s little flexibility to add to your savings.
Locks your funds up in a rising interest environment
If you tie up your funds for a term spanning several years, you could miss out on greater potential interest if rates rise across the length of the term.
Penalties for early withdrawal
If you change your mind or experience an emergency and have to access your funds early, you’ll not only lose interest but could be charged a penalty fee also.