The Core Mechanics of a Term Deposit
A term deposit is an agreement between you and a bank where you deposit a fixed amount for a fixed period (the term) at a fixed interest rate. The term can range from one month to five years, though terms of three to twelve months are most common for personal savers. The interest rate is locked at the start of the deposit and does not change during the term, regardless of what happens to interest rates in the market.
At the end of the term (the maturity date), the bank returns your deposit plus the accrued interest. You can then decide whether to withdraw the funds, roll them into a new term deposit at the prevailing rate, or transfer them elsewhere. Banks are generally required to notify you before the maturity date — usually 14 days in advance — giving you time to decide.
During the term, your money is generally not accessible without penalty. Early withdrawal — known as breaking the deposit — typically results in a reduced interest rate and may incur a break cost fee. The specific terms for early withdrawal are set out in the Product Disclosure Statement and vary by bank.
The Core Mechanics of a Savings Account
A savings account holds money that you can add to and withdraw from at any time (subject to any specific account conditions). The interest rate is variable — the bank can change it at any time, and it may include conditional components (see Dispatch 11). Interest is typically calculated daily and credited monthly.
The flexibility of a savings account is its primary advantage over a term deposit: you can access the money when you need it, add to the balance incrementally, and respond to changes in your financial situation without penalty.
The trade-off is rate certainty. The rate on a savings account can increase or decrease at the bank's discretion, and the bonus-rate conditions may change over time. You cannot lock in today's savings account rate for a fixed future period the way you can with a term deposit.
When One Tends to Be More Appropriate Than the Other
A term deposit tends to suit situations where you have a specific sum of money that you will not need access to for a defined period, where you value rate certainty over flexibility, and where the fixed rate available on a term deposit is competitive with or better than what you would earn on a savings account.
It is particularly useful for money that would otherwise sit in a low-earning account for a known period — a house deposit you are not yet ready to use, proceeds from a property sale while you decide what to do next, or money earmarked for a future large purchase with a clear timeline.
A savings account tends to suit situations where access to the money is important (as it is for an emergency fund), where you plan to add to the balance over time through regular deposits, or where you are uncertain about the timeline for needing the funds.
Some savers use both simultaneously: a savings account for the liquid emergency fund and actively accumulating savings, and a term deposit for a separate portion of savings with a known future use date.
What to Check in a Term Deposit PDS
Before placing a term deposit, the PDS should clarify: the exact interest rate and how interest is calculated (daily or at maturity); whether interest is paid monthly, at maturity, or annually; the specific conditions and costs for early withdrawal; the notification period before maturity and the automatic rollover terms; and whether the deposit is covered by the Financial Claims Scheme (which it will be if the bank is an APRA-regulated ADI, up to $250,000 per person per institution).
Major Australian banks offering term deposits include ANZ, Bendigo Bank, Commonwealth Bank, ING, Macquarie, NAB, St.George (a Division of Westpac Banking Corporation), and Westpac. For research questions to ask at each, see Dispatch 01.
What this dispatch does not do
- List or compare current term deposit rates at specific banks
- Recommend specific term deposit products
- Provide tax advice on interest income
- Provide personalised financial advice
