Long Term Deposits

A close look with Savvy at the pros and cons of long term deposits and what they can offer investors.

Last updated on July 1st, 2022 at 05:02 pm by Cate Cook

Compare long term deposits

Long term deposits are a safe and predictable way to invest your money.  However, interest rates and deposit providers vary widely, which is why it’s important to compare different products. Find out more about how to grow your nest-egg with Savvy and compare a range of term deposits and institutions with us to help inform your decision about which is the best for your savings.  Start your investment journey today.

site-logos Citi Term Deposit
  Maximum Rate Interest Rate Minimum Deposit Government Guarantee  
site-logos 2.25%
1 Year
1.00% $10,000 Yes
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$0 Set up and no ongoing account-keeping fees. Interest rate depends on balance amount. Optional 3,6,9 or 12 month terms. Balances from $10,000.

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Long term deposits explained

How do long term deposits work?

Term deposits work by providing a safe and reliable place to stash your savings, whilst at the same time providing a high rate of interest.  Although term deposits are available from one month up to five years, only deposits from one year upwards are considered long term deposits.

In return for locking away a portion of your savings for a set long period, banks, building societies and credit unions typically offer a guaranteed fixed high rate of interest for the duration of the deposit.  They’re a tried and tested way of providing a steady income stream in the form of interest earned on savings.

They work just like other bank accounts or debit cards in that you can see your term deposit account in your list of accounts online or on your mobile app and watch your savings grow as interest is added to your deposit.  However, you can’t add to your savings during the deposit period or access your savings until the end of the agreed deposit term.

Take advantage of compounding

In return for locking up a chunk of your savings, interest is paid either monthly, quarterly, half-yearly, annually or at the maturity of your deposit term.  The best interest rates offered for long term deposits are generally much higher than those offered on equivalent savings accounts, but it’s important to choose an option which compounds your interest frequently if you’re going to maximise the interest earned.

Compounding involves paying the interest earned back into the term deposit account, so you end up earning ‘interest on interest’ and can watch your savings grow exponentially.  If you divert your interest and have it paid into another bank account, you won’t benefit from the effects of compounding.

How do I compare long term deposits?

There are several features you should compare when looking at long term deposits.  These are:

  • Interest rate – expressed as a percentage per annum, the higher the interest rate offered, the better, and the faster your savings will grow. For example, a five-year deposit of $50,000 at 3.00% p.a. would generate $1,431 more than the same deposit at 2.50% p.a.
  • Interest payment – choose how often your interest is paid to you, with the more frequent period often resulting in the most interest. Even though you may be offered a slightly higher interest rate (often 0.05% p.a.) to receive your interest less often, it may be better to have it paid monthly or as frequently as possible.  Use Savvy’s term deposit calculator to work out how much you’ll receive each interest period.
  • Term availability – make sure the financial institution you choose offers the exact term you require. Not all institutions offer all lengths of time, so if you’re after a more unusual term (for example, 18 months) make sure this term is actually offered.  Most institutions do offer the standard one, two, three, four and five-year terms, however.
  • Minimum deposit limits – institutions have a required minimum deposit, which starts as low as $1,000 but can reach up to as much as $25,000 in some cases. When comparing long term deposit providers, make sure the one you choose has a minimum deposit requirement which suits the size of your savings.
  • Maximum deposit limits – these are more of a consideration for more serious long-term investors and self-managed super fund (SMSF) term deposits, starting at a maximum of $250,000 up to $5 million or more.
  • Withdrawal notice – most institutions require a period of notice before funds can be withdrawn from a long term deposit. This varies between 14 days and 30 days, so compare notice periods with Savvy before making your investment decision.
  • Emergency access to funds – most financial institutions have provisions to allow you to access your funds.  However, an early withdrawal penalty will usually be charged, ranging from $30 upwards to $50 or more.  In addition, you could also lose some of the interest that you would have earned on your deposit.  The amount that you’ll lose will be calculated as a proportion of the length of time you’d agreed to, and how early into this term you wish to break your deposit contract, which can reach up to 90% of your total interest earned.

Pros and cons of long term deposits

PROS

Higher interest rates

Long term deposits offer the prospect of a high interest rate (higher than that offered by most savings accounts), so they can help you grow your savings faster.

Guaranteed ROI

Since long term deposits have a fixed rate of interest for a fixed period, you’ll have a guaranteed return on investment (ROI) which you can budget and plan for in advance.

Help you reach your long term savings goals

By locking your savings away out of the reach of temptation and paying a high rate of interest, long term deposits can help you reach your savings goals more effectively.

No risk investment

All term deposits up to $250,000 are backed by an Australian Government guarantee (per person per financial institution) so term deposits offer a very safe investment.

CONS

No access to funds

Whilst having no access to your funds can be a good thing when saving, it can also prevent you from being able to use your funds when you truly need them.

Risk of missing out on rising interest rates

With rising interest rates now a reality in Australia for the first time in a decade, you risk missing out on higher rates if you lock in a long term deposit.

Early exit fees and penalties

If you do decide to withdraw your cash early, be prepared to pay early exit fees ranging from $30 upwards, and in addition lose some of the interest that you’d been expecting.

More of your questions about long term deposits

Are ten-year term deposits still available?

No – there are no financial institutions currently offering ten-year term deposits in Australia.  However, if you wish to invest for a ten-year period, you could take out one five-year term deposit and roll it over for another five years if the interest rate offered makes this choice worthwhile.

Do all long term deposits have a fixed rate?

Yes – by their very nature, term deposits offer a fixed high interest rate for a fixed term.  Variable interest rates are found with high-interest savings accounts.

What are the advantages of long term deposits over short term deposits?

The advantages of long term deposits are that they can protect you from interest rate falls and provide security and the predictability of a known interest income over a long period. However, short term deposits can be more advantageous in an economic environment where interest rates are climbing, as funds can be rolled over regularly into another short term deposit with a higher interest rate than had previously been offered.

Is the interest rate offered to businesses different for long term deposits?

Yes – most financial institutions offer different interest rates to their retail and business customers.  Self-managed super funds can take out term deposits too, but they tend to be grouped with business customers, which have their own requirements, regulations and often slightly lower interest rates.

What happens at the end of a long term deposit?

Your bank will contact you towards the end of your long term deposit and ask for instructions as to what to do with your funds when your deposit period is over.  Many financial institutions offer a ‘loyalty bonus’ interest rate, such as an added 0.05% p.a. or more, if you agree to roll over your funds for another term. 

However, if you wish to access your funds, you can instruct your bank to pay them into a transaction account.  Make sure you update your contact details and notify your bank if you change your phone number, email address or residential address during your term deposit period, otherwise your savings may end up in a fund for lost money.