How do term deposits work?
Term deposits are a way to invest your money and earn a fixed rate of interest.
Your money is locked away in an account, for the time that you choose (the term), usually between one month and five years. You need a minimum amount to open a term deposit, for example, $5,000.
Advantages of term deposits
Higher interest rates
Term deposits offer a higher interest rate than most transaction and saving accounts. Generally, the more money you put in, or the longer you invest, the higher the interest rate. Currently, interest rates on term deposits are high in Australia.
Protected by the Australian Government Financial Claims Scheme
The financial claims scheme (FCS) protects deposits made with Australian banks, building societies and credit unions. This guarantees to pay you up to $250,000 to replace deposits in the unlikely event your bank, credit union or building society fails. The safety net only applies to authorised deposit taking institutions regulated by APRA.
The Financial Claims Scheme (FCS) applies to a wide range of deposit accounts held with banks, building societies and credit unions (also known as authorised deposit-taking institutions or ADIs) that are incorporated in Australia, but only applies to deposit accounts with funds in Australian dollars. Under the FCS, deposits are protected up to a limit of $250,000 per account holder per ADI.
The list of banks, building societies and credit unions covered by the FCS is available here.
Under the FCS an account holder can be:
- an individual
- a body corporate (including companies)
- a body politic
- a partnership
- any other unincorporated association or body of persons
- the trustee(s) of a trust
- the trustee(s) of a superannuation fund (including a self-managed superannuation fund)
- the trustee(s) of an approved deposit fund.
An account holder can be an Australian resident/citizen or non-resident/non-citizen. In other words, the citizenship or residency status of an account holder does not have an impact on whether a deposit account is covered under the FCS. A group of individual trustees of a trust, superannuation fund or approved deposit fund are treated as a single account holder.
In the case of superannuation, an ADI deposit account held by the trustee of a superannuation fund on behalf of fund members is covered under the FCS up to the limit of $250,000. However, in most cases the $250,000 FCS limit would be applied to the whole fund, not each individual member.
The FCS applies to the following types of deposit accounts:
- savings accounts
- call accounts
- term deposits
- current accounts
- cheque accounts
- debit card accounts
- transaction accounts
- personal basic accounts
- cash management accounts
- farm management deposit accounts
- pensioner deeming accounts
- mortgage offset accounts (either 100 per cent or partial offset) that are separate deposit accounts
- trustee accounts
- retirement savings accounts
The FCS does not apply to the following accounts:
- accounts with funds that are not in Australian dollars
- accounts kept at overseas branches of Australian banks
- credit balances on credit card facilities or other loans
- pre-paid card facilities or similar products
- ‘nostro’ accounts and ‘vostro’ accounts of foreign corporations that carry on banking business or otherwise provide financial services in a foreign country
Compare the features of term deposits
Always shop around for the highest interest rate and best features before you choose a term deposit. Be sure to compare products across different financial institutions. It’s important to check:
| Interest rate | what is the interest rate? when interest is paid — monthly, annually or at maturity? |
| Time frame | how long you can invest for? how will interest rates change with different investment time frames? |
| Amount invested | how much you need to open a term deposit? how will the interest rate changes the more you invest? |
| Fees | is there are any set-up or account fees? how big the penalty fee is if you need your money early? |
Early withdrawal penalties
To earn interest on your term deposit, your money is locked away for a chosen period of time. If you need your money before the term ends, you may have to pay a penalty fee. You may only receive a proportion of the interest earnt, or none at all.
What to do when your term deposit matures
Term deposits are not a ‘set and forget’ investment. When your term deposit matures, your provider will contact you. They’ll tell you how much interest you’ve earned and what your options are.
If you do nothing, your term deposit may roll over into a new term deposit. There may be a fee to get your money out of the new term deposit. It could also have a lower interest rate than before.
Review your term deposit a month before it matures. Compare it with other products to make sure you’re getting the best deal.
For detailed information regarding tax implications regarding your term deposits please contact us the de Kretser team –
T: +61 3 9550 6900
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