Terms deposits are a common type of interest paying investment. They work in a similar way of a savings accounts held with an Authorised Deposit-taking Institution (ADI) which can be a bank, building society or credit union. When you put your money into a term deposit, your savings are locked for a fixed period (term) and you get a fixed interest rate over that term.
Want to know more? Read on to find out benefits, downsides and what to do when your term deposit is maturing.
The benefits of term deposits:
- There's virtually no risk of losing your money
- You earn a rate of return that's usually higher than a regular transaction account
- The interest rate will not change over the term you select
- When placed in an Authorised Deposit-taking Institution (ADI), all deposits up to $250,000 are guaranteed by the Government. This cap applies per person and per ADI. To find out more see government guarantee.
Some of the downsides:
- If you wish to access your money before it matures, a penalty is likely to apply.
- They may be less flexible and provide a smaller return than other comparable products. For example, bank online savings accounts (which are just as safe) can offer returns that are sometimes higher than those of term deposits.
- Honeymoon rates can drop if the investment automatically rolls over to a new term at maturity.
Choosing a term deposit
Term deposit rates vary so shop around for the best rate for the period that suits you. You can find this information here.
What to do when the term deposit matures
Term deposits are not a 'set and forget' investment. You probably shopped around for a good interest rate when you first took yours out, and it's just as important to shop around when it's maturing and you want to invest for another term.
When your investment is maturing, your bank or credit union will write and tell you how much interest you've earned and explain what your options are.
If you do nothing, your term deposit may automatically roll over into a new one. This may have a lower interest rate than the original or other similar products.
Call your provider straight away if you're not happy with the interest rate offered. You should be able to switch to a more competitive interest rate.
If you don't call straight away, you will probably be charged a fee to get out of the new term deposit. You'll also miss out on a competitive interest rate in the meantime.
Term deposits are a safe and reliable way to grow your wealth over time. At maturity decide whether it is still an appropriate investment for your current circumstances and check that the returns are competitive with other similar products.
Only an Authorised Deposit-taking Institution (ADI) can offer term deposits. Don't confuse them with less secure investments where the interest rate is fixed for a number of years. The Australian Prudential Regulation Authority has a list of ADIs.
Extract originally published by MoneySmart.