Term deposits guide

You need to consider lengths as well as rates when it comes to choosing a term deposit.
 
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01.Term deposits

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Interest on the best term offers now exceeds 5% per annum — better than the best internet savings accounts and much better than the interest paid on standard transaction accounts.

  • The key feature is certainty: rates are fixed for the term (so even if the Reserve Bank of Australia changes its rate, your return remains the same).
  • The drawback is you lose liquidity. With a term deposit, your money is locked away for a fixed length of time. Early withdrawals are usually penalised with a ‘break’ fee. Of course, not being able to touch your money for a period is attractive for some people – for example, if you’re saving for a goal such as a house deposit or car.
  • Terms range from three months to several years.
  • Interest is fixed and may be paid and credited to your account monthly, quarterly, semi-annually or on maturity (monthly is best). Rates vary depending on the amount of your deposit, the institution and the term — shop around. How frequently interest is paid and whether it’s compounded affects your return too — check the effective (compound) annual rates.

Term deposit tips

  • Rates change. Keep track of the term — the rate you sign up for may be attractive, but if you allow the deposit to roll over or be automatically reinvested when the fixed term expires, it may change to a much lower rate.
  • Shop around – the interest rate differences are really significant. Look for specials. Financial institutions sometimes decide to promote a specific term — for example, six months — for their best rates. Watch for ‘blackboard specials’ too – sometimes promoted at individual branches.
  • Read the product disclosure statement for full details of the investment.
  • Only invest with an Authorised Deposit taking Institution (ADI). Banks, building societies and credit unions are regulated by the Australian Prudential and Regulatory Authority (APRA), which means it’s likely they can meet their commitments to customers. Only ADI’s can offer deposit accounts. A list of ADIs is on the APRA website.
  • A shorter term might be best for you if you think interest rates will rise again soon, or if you're saving for your first home and are considering opening a First Home Saver Account when those accounts become available in October.

Please note: this information was current as of July 2008 but is still a useful guide to today's market.


 
 

 

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