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Term deposits and interest rates: What does it all mean?

Term deposits and interest rates: What does it all mean?

Are you looking at different ways to make your savings grow? A term deposit can be a secure way to invest and a potentially handy solution if you’re concerned about interest rates dropping further in the coming months or years.

What is a term deposit?

A term deposit is a deposit account in which you put away money for a certain period of time – what’s known as “the term” – and then lock in an interest rate so that you know the interest you’ll earn on your initial amount.

Typically the length of the term varies from one month to five years, and the interest rate is dependent on the investment amount.

The positives of term deposits

Term deposits help you lock money away and therefore can remove the temptation to access it. Because they’re a little more restrictive with regard to how you access your money, historically they have been able to offer higher interest rates as well.

Term deposits are one of the lowest-risk investment opportunities, particularly because the government guarantees term deposits up to $250,000 with an Authorised Deposit-taking Institution (ADI) such as a bank.

The risks

While there is little risk in terms of the money you invest at the outset, you do risk losing out on the potential for bigger returns. Investing in other areas such as shares and property can be more lucrative, but may also open up the potential for losses.

Not being able to access your money can be a positive and also a negative. Because it’s locked away you might not be able to gain access to it straight away if you need to.

Key considerations

Questions to ask when looking at term deposits include:

  • Are there early exit costs or fees?
  • Do you have to create an additional deposit account?
  • Will the term deposit be automatically renewed? If so, will it be renewed at a lesser interest rate?
  • Will the interest you earn outpace inflation?

This article is intended to provide general information of an educational nature only. It does not have regard to the financial situation or needs of any reader and must not be relied upon as financial product advice.