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Term deposits offer a means to grow your nest-egg and make your savings work harder for you. Because they form such an important part of many people’s savings plans, term deposit interest rates need careful comparison to make sure you get the best deal available, which you can do right here with Savvy.
We can help you compare term deposits from multiple financial providers and bring you accurate and up-to-date interest rate information and other important comparison details so you can make the right call and maximise your interest return on your deposit.
Term deposits are an agreement between a customer and a financial institution to deposit (lock away) a specified amount of money for a certain period in return for a set interest rate. The amount to be deposited (called the principal sum), the length of time it will remain locked up (called the term of the deposit) and the interest rate are all fixed at the beginning of the deposit period.
This type of deposit typically offers a higher rate of interest than a standard or high interest savings account. Terms are available from a minimum of one month up to a maximum of five years. You can choose the exact period over which you wish to lock your money up. However, in most cases, you won’t be able to access those funds without providing sufficient warning, which may result in a penalty charge.
The national cash rate
The banks and financial institutions typically set their interest rates based on the cash rate determined by the Reserve Bank of Australia (RBA). Once the RBA has announced the cash rate, banks consider if they are going to hold, increase or decrease their own interest rates, both on loans and savings. They aren’t legally obliged to match any changes announced by the RBA but, in the past, the major banks have traditionally followed the RBA’s lead.
The term of your deposit
Additionally, the longer the term you choose, and the more you deposit, the higher the interest rate you’re likely to be offered. This is called a ‘tiered’ interest rate system. Interest rates rise as the size of your deposit and term length grow. For example, a bank may offer a six-month interest rate of 0.65% p.a. for a term deposit of $5,000. This may rise to 1.25% if you agree to a term deposit of one year. If you have $50,000 to deposit, the interest rate offered could be as high as 2.5% p.a. if you agree to park your funds for a minimum of two years.
The frequency of your interest payments
The frequency with which you receive your interest also affects the interest rate you receive. You have a choice as to whether you receive your interest monthly, every three months, quarterly, annually or at the maturity of your deposit. Generally, if you choose to receive your interest annually or at maturity you’ll get a better interest rate, but you’ll lose the compounding effect of earning ‘interest on interest’ if you choose to have your interest paid back into your term deposit on a more regular basis.
Where are interest rates heading?
In November 2020, Australia’s official cash rate reached its lowest level in history at 0.1% p.a. and remained there for the next 15 months. However, in May 2022, the RBA increased the official cash rate by 0.25% p.a. for the first time since early 2010, signalling that the tide has turned and interest rates may now be on their way up again (in response to a rising 5.1% inflation rate). The RBA anticipated further rate rises in 2022.
In response to this increase in the official cash rate (up to 0.35% p.a.), most banks and financial institutions raised their interest rates. This is good news for those looking to lock their money away in a term deposit, as it means their savings will likely earn a higher rate of interest.
Naturally, the interest rate you receive for your term deposit will be the most important factor when deciding which financial institutions to park your savings with. For instance, on a $15,000 deposit over three years with interest paid monthly, you’d earn an extra $225 in interest by opting for a deposit with a rate of 2% p.a. compared to 1.5% p.a.
However, if interest rates are equal, what other factors should you consider? These include:
Comparing savings accounts and term deposits is like comparing apples with oranges. While a savings account is also a place to deposit your extra cash and earn interest, that’s where many of the similarities end.
With a savings account, you can take your money out and add more funds at any time you wish, which isn’t the case with term deposits. They’re locked in place for the set period you’ve chosen (except in an emergency, which banks call ‘exceptional circumstances.’)
Term deposits also run for a set period, whereas savings accounts are open-ended and have no closing date. At the end of your term deposit period, you’ll have to decide whether to roll your funds over into another term deposit or transfer them to another bank account.
If you’re sure you won’t need to access your savings for a length of time, a term deposit will offer you the best way to grow your nest-egg and earn the highest interest. However, if you foresee a need to dip into your savings, either choose a short term deposit (for example, one-month terms are available) or stick to a high-interest savings account and enjoy the flexibility they offer.
In general terms, the smaller online banks, building societies and credit unions offer the best interest rates on term deposits. These online lenders have lower overheads and so can offer the highest interest rates available in Australia.
As of June 2022, the highest interest rate on a two-year term deposit is offered by AMP Bank, which is offering 3.6% p.a. for a minimum $5,000 deposit for 24 months. Other top rates for different term lengths include:
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The higher the sum you deposit, the more interest you’ll earn. Larger sums also attract higher interest rates from some financial institutions on a tiered scale, so the higher your deposit, the higher the interest rate.
Longer deposit terms also attract higher interest rates, so your savings could grow more quickly if you leave them in a term deposit for the longest possible time.
Decide in advance what you’ll do when your term deposit period comes to an end. Don’t forget about your savings or they may end up locked in a holding account for abandoned money (earning little or no interest) while your bank waits to hear from you.
Once you’ve deposited your savings into a term deposit, leave them alone and let them mature like a good bottle of red wine. Expensive penalties apply if you break your deposit contract to get access to your funds early.
Don’t just settle for the interest rate offered by your standard bank. Compare interest rates with Savvy to find the institution which offers the highest interest fixed term deposit.
If interest rates are rising, balance the need to chase a higher interest rate for a longer-term deposit with the possibility of getting a better deal when interest rates are increased. If you do lock your funds away for several years, you could miss out on interest rate hikes in that period.
Quantum Savvy Pty Ltd (ABN 78 660 493 194) trades as Savvy and operates as an Authorised Credit Representative 541339 of Australian Credit Licence 414426 (AFAS Group Pty Ltd, ABN 12 134 138 686). We are one of Australia’s leading financial comparison sites and have been helping Australians make savvy decisions when it comes to their money for over a decade.
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© Copyright 2024 Quantum Savvy Pty Ltd T/as Savvy. All Rights Reserved.
© Copyright 2024 Quantum Savvy Pty Ltd T/as Savvy. All Rights Reserved.
Quantum Savvy Pty Ltd (ABN 78 660 493 194) trades as Savvy and operates as an Authorised Credit Representative 541339 of Australian Credit Licence 414426 (AFAS Group Pty Ltd, ABN 12 134 138 686). We are one of Australia’s leading financial comparison sites and have been helping Australians make savvy decisions when it comes to their money for over a decade.
We’re partnered with lenders, insurers and other financial institutions who compensate us for business initiated through our website. We earn a commission each time a customer chooses or buys a product advertised on our site, which you can find out more about here, as well as in our credit guide for asset finance. It’s also crucial to read the terms and conditions, Product Disclosure Statement (PDS) or credit guide of our partners before signing up for your chosen product. However, the compensation we receive doesn’t impact the content written and published on our website, as our writing team exercises full editorial independence.
For more information about us and how we conduct our business, you can read our privacy policy and terms of use.
