A guide to term deposits

What is a term deposit and how does it work?

Term deposits are a low-risk financial product where you store a lump sum of your money away for a set period of time, known as the 'term'. These terms can last anywhere from a month to a couple of years, depending on the institution, and you're paid an interest rate on this sum of money. The interest rate can vary depending on factors such as how long the term is.

Term deposits are different from savings accounts. Savings accounts let you withdraw money at any time, whereas with a term deposit, your money is locked away until the term is up, which is known as the term deposit's 'maturity'.

The nature of term deposits means they're a very low-risk product, preferred by investors who are happy to sacrifice potentially higher returns in exchange for safety and security.

Are term deposits a safe product?

Term deposits are a safe product, since the institutions offering them need to be Authorised Deposit-Taking Institutions, or ADIs for short. An ADI is supervised by the Australian Prudential Regulation Authority (APRA) under the Banking Act and any term deposit offered by an ADI is backed by an Australian Government Guarantee, which means you can get up to $250,000 of your money back if the institution you bank with collapses.

This is an extremely unlikely scenario which almost never happens in Australia, but it does guarantee up to a quarter of a million dollars with each institution. So should the worst happen, your money will be protected.

The downside to this is that interest rates on term deposits can sometimes be lower compared to other higher risk investment products.

How often is interest paid on term deposits?

When you receive your interest payments will depend on the length of the term deposit chosen.

Some institutions, such as Firstmac, offer the option to have interest paid at maturity only. This means you will receive your interest payment when your chosen term deposit ‘matures’. For example, if you have chosen a 12 month term deposit, you will receive your interest 12 months after your term deposit commencement date.

Other institutions may offer different interest payment options, such as monthly, quarterly, or annually (if you have taken out a term deposit greater than 1 year).

How is interest calculated on a term deposit?

Interest on term deposits is generally calculated using ‘simple interest’, which means interest is calculated on your initial deposit balance, the count of days you are invested, and the interest rate on your term deposit.

Let's say you have a $10,000 term deposit, invested for 180 days (6 months), at a rate of 1.5%. The interest you would earn on this term deposit would be calculated in the example below:

Interest = ((rate x deposit amount) / 365) x term (days)

Interest = ((1.5% x $10,000) / 365) x 180

Interest = ($150 / 365) x 180

Interest = $0.411 x 180

Interest = $73.97

*note the above calculation is only for indicative purposes

Is there a minimum amount required for investing in a term deposit?

Many institutions will have a minimum investment amount required on term deposits, but they vary from provider to provider. A common minimum term deposit investment is around $5,000, which is Firstmac’s minimum amount required for our Term Deposits. Certain term deposits with higher interest rates might require a minimum of at least $100,000.

What happens when a term deposit matures?

At maturity, you will be able to choose between a couple of different options:

• Your initial deposit and any interest earnt will be deposited into your nominated bank account; or

• The term deposit + interest will roll over into a new term deposit with a new term and rate (the term is chosen by you); or

• Part of your term deposit funds (ie, just the interest, or interest plus some of your initial investment) is transferred to your nominated bank account, and the remaining amount is rolled over into a new term deposit.

Your financial institution will usually notify you before your term deposit reaches maturity, and there's usually a cooling off period of about a week where you may be able to ask your provider to give you your money back if it does roll over without your knowledge.

If you do want your term deposit to rollover, then you've got a few options:

• You can reinvest the whole amount

• You can reinvest the initial deposit and keep the interest

• You can withdraw the initial deposit and some of the interest while keeping a smaller amount deposited

Are there any fees on term deposits?

Term deposits are a fee-free product in most cases. All Firstmac’s Term Deposits are completely fee free. Some institutions may charge a fee if you break the term of your deposit early, however others, such as Firstmac, will simply pay a smaller interest rate for the time you have been invested, if longer than 7 days. If you break your term deposit with Firstmac, and it has been invested for less than 7 days, you will simply receive your initial deposit back with no interest earnt.

Advantages and disadvantages of term deposits

Confused? Here's a quick summary of the advantages and disadvantages of term deposits:

So is a term deposit right for me?

This depends on what you're looking to gain from your money. If you're a bit of a risk-taker and want to see your investment grow faster and bigger, then you may want to consider higher risk investments like property, or shares, and speaking to an financial advisor may be a great step to discuss your options available.

Term deposits, on the other hand, are low risk, low reward products - you're pretty much guaranteed to get what you're promised when you put your money in. In times of increasing economic uncertainty, it might not be such a bad idea to add a term deposit to your portfolio, after you've carefully considered multiple different institutions and their offerings, including factors such as:

• Their interest rates

• The terms offered

• How frequently interest is paid

• How big the early exit penalties are (if any)

• Options available at maturity

You may wish to use our term deposit calculator to work out how much you could earn in interest to help make up your mind.

If you’re ready to apply for a term deposit, why not consider one of Firstmac’s high-interest term deposits? We have absolutely no fees (ever) for our term deposits, and your application can be completed in as little as 10 minutes online, by clicking here. Once you’ve completed your application, we will contact you to help finalise your term deposit. It’s as simple as that!