Term Deposits vs High Interest Savings Accounts
If you’re saving money for a specific goal like a new car or a holiday, the traditional approach is to store your savings in a high interest savings account or a term deposit.
Both are low-risk investments offering modest returns but, despite these similarities, they also have important differences.
That means that one will be more suitable than the other at various points of your savings journey.
Below we review the pros and cons of each investment to help you decide.
What is a high-interest savings account?
A high interest savings account is similar to an everyday bank account but it offers a very competitive interest rate to help your savings grow.
High-interest savings accounts all come with variable interest rates, meaning your rate could go up or down over time, especially if the Reserve Bank changes its official cash rate.
As high interest rates are intended to help you save, not spend, they may offer incentives, such as bonus interest, to encourage you to make regular deposits. They also often limit the number of withdrawals you can make and may require you to maintain a minimum balance.
Types of high-interest savings accounts
There are two main types of high-interest savings accounts: conditional savings accounts and standard savings accounts.
Conditional savings accounts –require you to meet a number of conditions, such as maintaining a minimum balance, making monthly deposits, and making no withdrawals in a calendar month in order to qualify for the high interest rate.
Standard savings accounts - these have a high introductory rate for a few months, and then the account reverts to a lower standard variable rate.
Pros of a high-interest savings account
Low-risk – savings accounts can only be offered by Authorised Deposit Taking Institutions (ADIs), like banks and credit unions, and are covered by the Federal Government’s Deposit Guarantee up to $250,000 per account holder per ADI. Their value doesn’t fluctuate unless you take money out, unlike shares or most other investments.
Flexible – you can generally add money to the account whenever you want to, and can withdraw with relatively small penalty.
Easy to open and close – Opening or closing an account is straightforward and, because you aren’t locked into the account for a fixed period, you can easily shut it to chase higher interest elsewhere, or to make an urgent purchase.
Cons of a high-interest savings account
Low return – they may be “high interest” compared to a regular savings account or stuffing it under your bed, but these accounts really don’t offer very high returns.
What is a term deposit?
A term deposit is a sum of cash held with a financial institution. Your money is invested at an agreed rate of interest over a fixed amount of time (the term). That means that from the outset you know exactly what the rate of return on your money will be.
At the end of the term, you will be given back your money, along with the interest it has earned. In Australia, term deposits may only be offered by Authorised Deposit Taking Institutions (ADIs), and they are covered by the Federal Government’s Deposit Guarantee per account holder per ADI.
Term deposits are offered with a wide variety of terms, ranging from just a month to 5 years or more.
To remove your money before the agreed term is finished, you may have to give up to a month’s notice, and you will probably have to pay a substantial penalty fee.
If rates on new term deposits go up during the term, you will be stuck on the existing rate until the term is over, which can be frustrating.
On the flipside, if interest rates fall, you will continue to enjoy your existing, higher rate.
Pros of a term deposit
Simple - Unlike many financial products, term deposits are straightforward and easy to understand.
Low maintenance - Once you have a term deposit, you don’t need to do anything until it’s about to mature.
No fees - financial institutions don’t charge fees unless you want your money back early.
Fixed return – you know at the outset how much you will get back
Can’t be spent – You can’t spend the money on impulse
Safe – deposits up to $250,000 per account holder per ADI are guaranteed by the Federal Government
Cons of a term deposit
Missing a rate rise – if rates rise, you can’t take advantage of it
Low return – term deposits typically have higher interest rates than savings accounts, but lower than many other investments
Hard to access – you can’t access the money before maturity without paying substantial break fees.
No flexibility - you can’t make extra deposits
So there you have it. High-interest savings accounts are great for encouraging you to save money, while term deposits are best for locking away the money you have saved already.
If you are considering a term deposit, don’t forget to check out Firstmac’s term deposits, starting from a term of just 30 days and $5000 minimum investment.