Term deposits offer certainty of return, with a fixed interest rate for a given length of time. Here’s how they work and how they compare with other ways to save.

Term deposits are a type of savings account where you commit your money for a fixed period of time.

They can be useful when you’re looking for certainty about what interest rate your money will earn. For example, if it’s your goal to buy a new vehicle but want to wait until the end of the next financial year to grab a bargain in the sales, you might arrange a term deposit that matures around then.

At the end of that period, you receive the principal amount you originally invested plus the rate of interest you agreed to at the start. That means you can plan with confidence, because you know what you’ll get at the maturity date.

After your term deposit matures, you may also reinvest the principal (the amount you originally put in) plus interest, reinvest either principal or interest, or withdraw part or all of your money.

How term deposits work

With a term deposit, the length of time of the deposit account has a corresponding interest rate. You can choose the length of time you want the account for and the amount you want to deposit based on your needs.

When choosing a term, you’ll usually have a range of options, varying from short term – starting at one month, to long term – up to five years. Interest is paid only at the end of the term. Term deposits have a minimum amount that you can invest, which varies widely.

As there’s nothing to track before the maturity date and your deposit is earning interest automatically, they’re a set-and-forget kind of investment.

Once you’ve reached the maturity date, your money is released. Some financial institutions offer rollover term deposits. This means when one term ends, you have the option of reinvesting either the whole or a selected amount in another term deposit. If you opt for this, make sure to check that the interest rate you’re offered is still competitive on the rollover date.

What’s the difference between term deposits and other accounts?

Term deposits are simpler but less flexible than some other ways to save.

They often offer a higher interest rate than an everyday or savings bank account, to compensate for your money being out of reach for a given amount of time (although bonus rates offered on some accounts may be higher than those on term deposits).

• They usually come with no set-up fee.
• Term deposits give you assurance that you’ll get exactly what you expect, if you leave your money in for the full term. It also means that if interest rates fall during that time, you’re likely to do relatively well with a set rate.
• On the other hand, if interest rates rise, you’ll do relatively less well.
• Your money is locked away for the full term, so if you need to access it before that time you may have to give notice in advance, and you’ll pay a penalty fee or earn less interest.
• There’s also no option to top up the amount in your term deposit.

How interest is calculated and paid

The interest rate is fixed and guaranteed at the outset, and is paid at the end of the term. In most cases, you don’t earn interest if you access your money early.

Are term deposits safe?

Term deposits may be considered a safer investment when compared to other types of investments such as shares, as they’re not susceptible to market movements or interest rate rises or falls.

Combined deposits up to $250,000 per customer are also protected by the Australian Government guarantee.

Is a term deposit right for me?

That depends on your needs and your savings style.

Term deposits are generally low-risk investments with a guaranteed return. As the return is predictable and you can’t change the amount you deposit once you’ve set it up, they’re less flexible than some other alternatives.

In uncertain economic times they might be worth considering once you’ve done your homework and worked out what you can afford to put away, and for how long.

Where to open a term deposit

Most banks, building societies and credit unions offer term deposits. Rates on offer change frequently, so shop around to lock in the rate and term that’s right for you.

Find up-to-date term deposit interest rates and features offered by AMP Bank. You can also use the online calculator to estimate your rate of return over different time periods and levels of investment.