Complete Guide to Term Deposits in Australia

What Are Term Deposits?

A term deposit is a type of savings account where you deposit a fixed amount of money for a set period (the "term") at an agreed interest rate. In exchange for committing your funds for this period, you typically receive a higher interest rate than regular savings accounts.

Term deposits are offered by banks, credit unions, and building societies throughout Australia. They're considered one of the safest investment options available, making them popular among conservative investors and retirees.

Key Features of Term Deposits

• Fixed term: Typically ranging from 1 month to 5 years
• Fixed interest rate: Rate remains constant throughout the term
• Minimum deposit: Usually between $1,000 and $10,000
• Low risk: Protected by the Australian Government guarantee up to $250,000
• Predictable returns: You know exactly how much you'll earn

How Term Deposits Work

The process of opening and managing a term deposit is straightforward:

1. Choose your institution: Compare rates from different banks and financial institutions using our comparison tool.
2. Select your term: Decide how long you want to lock your money away (e.g., 6 months, 12 months, 24 months).
3. Deposit your funds: Transfer the amount you wish to invest into the term deposit account.
4. Earn interest: Your money earns interest at the agreed rate throughout the term.
5. Receive your returns: At maturity, you receive your original deposit plus the interest earned.

Interest Payment Options

Most financial institutions offer different interest payment options:

• At maturity: All interest paid when the term ends (usually offers highest rate)
• Monthly: Interest paid into a separate account each month
• Quarterly: Interest paid every three months
• Annually: Interest paid once per year

How to Choose the Right Term

Selecting the appropriate term length is crucial for maximizing your returns while maintaining financial flexibility. Consider these factors:

Assess Your Cash Flow Needs

Only invest money you won't need during the term period. Early withdrawal typically results in penalties and reduced interest rates.

Consider Interest Rate Trends

• Rising rates: Consider shorter terms (3-6 months) to take advantage of future rate increases
• Falling rates: Lock in longer terms (2-5 years) to secure current higher rates
• Stable rates: Choose terms based on your cash flow needs

Laddering Strategy

Instead of putting all your money in one term deposit, consider "laddering" by splitting your investment across multiple terms:

• Provides regular access to portions of your investment
• Allows you to take advantage of rate changes
• Reduces the risk of locking all your money at a low rate

Understanding Interest Rates

Interest rates on term deposits are influenced by several factors:

Reserve Bank Cash Rate

The Reserve Bank of Australia (RBA) sets the official cash rate, which influences all interest rates in the economy, including term deposit rates. When the RBA raises rates, term deposit rates typically increase, and vice versa.

Term Length

Generally, longer terms offer higher rates, though this isn't always the case. Sometimes shorter-term deposits might offer competitive rates when banks are seeking to attract deposits quickly.

Deposit Amount

Larger deposits may qualify for higher interest rates. Some banks offer "premium" or "special" rates for deposits above certain thresholds (e.g., $50,000 or $100,000).

Market Competition

Banks compete for deposits, so rates can vary significantly between institutions. Smaller banks and credit unions often offer higher rates to attract customers from major banks.

Tax Implications

Understanding the tax treatment of term deposit interest is important for accurate financial planning:

Income Tax on Interest

Interest earned on term deposits is considered taxable income and must be declared in your annual tax return. The interest is taxed at your marginal tax rate.

Tax File Number (TFN)

You must provide your TFN to your financial institution. If you don't, they're required to withhold tax at the highest marginal rate (currently 47%) from your interest payments.

When Tax is Paid

Even if you choose to receive interest at maturity, you must declare and pay tax on the interest in the financial year it's earned, not when you receive it.

Superannuation Term Deposits

Term deposits held within superannuation are taxed at concessional rates (up to 15%), making them potentially more tax-effective for some investors.

Pros and Cons of Term Deposits

Investment Strategies

1. The Laddering Strategy

As mentioned earlier, spreading your investment across multiple terms with different maturity dates provides flexibility and reduces risk.

2. The Split Strategy

Divide your savings between term deposits and more liquid investments (like high-interest savings accounts) to balance security with accessibility.

3. Rate Shopping at Maturity

When your term deposit matures, don't automatically roll it over with the same bank. Shop around for the best current rates using our comparison tool.

4. Diversification Across Institutions

Spread large amounts across multiple banks to ensure full coverage under the government guarantee ($250,000 per institution).

5. Special Introductory Rates

Some banks offer higher introductory rates for new customers. Take advantage of these offers when available.

Australian Government Guarantee

The Financial Claims Scheme (FCS) is an Australian Government scheme that provides protection to depositors of up to $250,000 per account holder per authorised deposit-taking institution (ADI).

What's Covered?

• Term deposits
• Savings accounts
• Transaction accounts
• Cheque accounts

Coverage Limit

The $250,000 limit applies per person per ADI. If you have multiple accounts with the same bank, they're added together for the guarantee limit.

Maximizing Protection

For deposits over $250,000, consider splitting across multiple banks to ensure full protection.

Frequently Asked Questions