News & Information

Term Deposits: What Are They and How Do They Work?

August 29, 2018

Term Deposits are an easy, simple and useful way to invest your funds that can help you save some extra money.  But what exactly is a term deposit? Well, as the name denotes, a Term Deposit is a sum of money that is invested, or deposited, for a fixed amount of time, a term, at a fixed interest rate over the period of the investment.  Once the term deposit reaches the end date of the specified term the term deposit ‘matures’, which means that the funds are available to be accessed or reinvested again.   Term deposits are the most common and well-known type of investment that pays interest.

Term deposits can be one of the safest ways to invest your money, since you are essentially ‘locking away’ your money for a set amount of time with a fixed interest rate you’ll know exactly how much money you’ll get back when the term deposit matures.  It’s important to note that term deposits are only offered by Authorised Deposit-taking Institutions (ADI), which can be a bank, credit union or building society. So before making any investment it is always wise to double-check that the institution is an approved ADI to ensure the safety of your money. It’s also good to note that any term deposit up to $250,000 is guaranteed by the government which means that no matter what happens, you can be confident that your funds will be returned to you at the expiration of the term.

Important terms to understand when deciding the use a term deposit arrangement;

  • Maturity date;

is the date on which the investment will expire. At this point, you will be able to choose to reinvest, move the funds elsewhere or take the proceeds including the interest earned

  • Term (sometimes known as Tenure);

Generally, the months the funds must be invested for. Banks offer terms across a wide range of periods from one month through to 60 months or more…

  • Rate;

The amount of interest offered to you as the investor. The interest rate is annualised then divided by the number of days the investment is held for

  • Short-term term deposit arrangement

Where you are uncomfortable locking funds away for extended periods, a short-term term deposit arrangement may suit your needs. Short-term arrangements generally offer lower interest rates. Short-term arrangements generally run to around 6 months.

  • Long-term term deposit arrangement

If you are comfortable with locking away your funds for a longer period of time, then this may be a more suitable investment vehicle as the ADI generally offer higher rates for longer term investments. Please bear in mind changes to prevailing rates wont alter the rate you are being paid.

So how does a term deposit work?

Let’s say you were to invest $40,000 for 4 months at an interest rate of 2.48%. At maturity date, your term deposit matures and you receive $40,000 plus interest of $330.66.  At that point you can either choose to transfer the funds to another account, reinvest in another term deposit, or use the funds for something important. It’s simple in the sense that once you’ve chosen the type of term deposit you would like, you don’t have to think about it again until it matures. And if you deal with a financial planner they will do all the work for you.

So what are pros and what the cons?

Pros…

  • As with any investment there are always pros and cons. Some of the benefits of investing in a term deposit are:
  • It’s an easy way to invest your money to help meet a savings goal, especially if its short term
  • There’s virtually no risk of losing your money
  • You usually earn a higher rate of interest than a regular transaction account
  • The interest rate is fixed for the term of your deposit, which mean it will not change
  • When your term deposit is invested in an Authorised Deposit-taking Institution (ADI), all deposits up to $250,000 are guaranteed by the government

Cons…

  • If you wanted/needed to access your funds early, or ‘break your term’ you are likely to incur a penalty. Generally, you cannot access the funds without providing a minimum of 31 days’ notice. Where the term to maturity is less than 31 days, you will have to wait until the maturity date.
  • You may find they are less flexible and provide a smaller return in comparison to other products, for example, a banks online savings account.
  • ‘Honeymoon rates’ offer a higher initial rate to attract new funds but the rate then drops at the close of the term of the investment. The ADI hopes you will remain invested at the lower rate.

If you’re thinking about investing in a term deposit be sure to confirm the institution you wish to invest with is an ADI, but also consider how much money you must (Minimums often apply) invest, the interest rate, the length of the term and if you will have time to reinvest your savings once the term deposit matures.

When LifeTime Financial Group establish term deposit arrangements for our clients, we often break these up into smaller parcels and spread the term of investing. This allows our clients to access funds should the need arise without breaking the whole Term deposit.

LifeTime Financial Group are specialist (holding appropriate accreditations) advisors who are ideally positioned to assist you with placing term deposit arrangements. We also receive favourable rates from many institutions because of the volumed we place.

Would you like to discuss your personal position further with one of our highly qualified financial planners? Why not call us today on 03 9596-7733. There is no cost or obligation for our initial conversation/meeting.

Written by Anthony Stedman of LifeTime Financial Group. A leading privately owned Melbourne based Financial Planning practice