The Complete Guide To Term Deposits In Australia

A term deposit is a type of savings account that pays a fixed rate of interest over a specified period of time (called the term), typically ranging from one month to five years.

To open one, you require a minimum amount of money. This is usually $5,000 but some banks and credit unions offer term deposits to savers with as little as $1,000.

A key feature of term deposits—and one that differentiates them from standard savings accounts—is that the money deposited must be left in the account for the full term, and if withdrawn early, you will usually incur a financial penalty.

Financial planner and money mentor Adele Martin says she’s noticed an uptick in questions about term deposits since official interest rates set by the Reserve Bank of Australia began to rise, as rising interest rates have translated into higher term deposit interest rates (although banks have been criticised for being slower to pass these hikes on to savers).

Both the amount you invest and the term have an impact on the interest rate you will receive. For example, a $10,000 term deposit with a two-year term will attract a higher rate of interest than a $5,000 term deposit with a six-month term.

Depending on how it is structured, the interest earned can either be paid to you at the end of the term, along with the initial amount you invested, or paid periodically throughout the term, such as monthly or quarterly. In the case of periodic interest payments, you can choose to either withdraw the interest or reinvest it into the term deposit.

There are a range of advantages of term deposits, including:

• Guaranteed and predictable rate of return: The rate of interest is guaranteed, so you know exactly how much you will earn, rather than the return fluctuating depending on the performance of an asset class, as can be the case with other types of investments.
• Low-risk: Both the rate of return and the money you deposit is guaranteed. Deposits of up to $250,000 are covered by the Australian government under the Financial Claims Scheme should the financial institution fail.
• Enforced saving: If you’re tempted to dip into your regular savings account a term deposit can ring-fence your savings beyond your reach. “If you leave your money sitting in a savings account, it’s really easy to dip into it for an ‘emergency’ trip to Bali,” Martin says.
• Higher returns than savings accounts: Martin says term deposits usually offer a better interest rate than savings accounts, however she adds that it’s important to shop around. “You have to be careful as some online savings accounts are offering very good interest rates right now, with the benefit of immediate access to your money.”

Despite the appeal of term deposits, they do have their potential drawbacks, including:

• Lower returns than other asset classes: The returns tend to be lower than those offered by other investment options, such as shares, managed funds or property.
• Low liquidity: Unlike shares, once your funds are deposited, they are locked in for the agreed term, and cannot be easily accessed without incurring a penalty. Furthermore, if you do need to break the term deposit it may take some time (ranging from days up to a month) for your money to be returned. Make sure you won’t need to access the money in a term deposit any time soon.
• Tax is payable on interest earned: The interest you earn is treated as income for tax purposes. As such, it will need to be declared in your tax return and will be taxed at your marginal tax rate.
• Returns not keeping up with inflation: The rate of return may not keep up with inflation over the long term, meaning that the purchasing power of your money may decrease over time. For example, when Australia’s inflation rate was as high as 7.8% back in January  2023, ANZ and Westpac were only offering a 4.1% term deposit rate on $5,000 for 12 months. Furthermore, since 1900 the Australian sharemarket has returned an average of 13.2% per year, but, of course, that is over the long term.
• Locking in too early: If you lock your interest rate in before the beginning of a rate hike cycle, then you will be at a disadvantage. Timing is everything.
• Penalties for early withdrawal: Most banks impose a penalty for early withdrawal, which can result in a lower rate of return or a loss of some of the savings you initially deposited.

Martin’s top tips for choosing a term deposit include:

• Consider the term you’re comfortable investing for and whether you want to receive the interest incrementally throughout the term or at the end of the term.
• Read the terms and conditions to understand what financial penalties will apply if you need to break the term deposit.
• Shop around for the highest interest rate you can find for the amount you have to deposit and the term you are looking for.
• Be aware that smaller banks and credit unions tend to offer higher term deposit interest rates than the big four banks.
• If you’d rather take out your term deposit with your existing bank, use the interest rates on offer from other providers to negotiate a better deal for yourself.

While rates on deposits are always changing, the best term deposits currently on offer in the Australian market are paying interest at 5% and above for a one-year term or less. This is higher than the official inflation figure of 3.8%.

At the time of publishing on August 14, 2024, Bank of Melbourne, St. George and BOQ were offering 4.8% on 12 months on a $5,000 deposit, while neo-bank Judo was offering 5.1%. Bank of Sydney is offering 5.1% for six months on as little as $1,000 (online only), while ING is promoting a term deposit rate of 5.2% for an 11-month lock-in. Australian Unity is also offering 5.10% on six months with a minimum $5,000 deposit.

You can read more about term deposits, including the latest rates, in our guide to the best term deposits in the market.