Key takeaways.
- A term deposit is a low-risk savings option where you lock away a lump sum for a set period at a fixed interest rate.
- It’s ideal for savers who want certainty, simplicity and protection from spending temptations.
- Benefits include higher fixed interest rates than standard savings accounts, no fees and a set and forget approach.
- Downsides include limited access to funds, penalties for early withdrawal, inability to add extra money once started and missing out if interest rates rise.
- They compare well with alternatives like savings accounts (more flexible but conditional rates), cash management accounts (lower rates) and offset accounts (good for mortgage holders).
- Best suited for saving towards goals like a home deposit, renovations, or preserving a lump sum.
If you’re someone who can’t resist temptation – like eating a pack of TimTams in one sitting – finding a savings strategy that removes the urge to dip back in can be a smart way to grow your money. For many, a term deposit is a savvy option.
Whether it’s saving for a home deposit, building a nest egg or getting ahead in life, most of us know we should be squirrelling money away for our financial future.
The question is, how? Especially when we’re confronted with a myriad of competing big ticket expenses and spending temptations.
One of the simplest ways to save is with a term deposit, where your money is safe, predictable and off-limits to temptation. So, what is a term deposit and how does it differ from a savings account?
How do term deposits work?
On the whole, term deposits are a fairly low-risk investment in Australia.
When you open a term deposit, you lock away an amount of money at a fixed rate for an agreed length of time (AKA the ‘term’). This money cannot be touched or accessed until the term is over, unless you give notice (which can cost you money).
Why choose a term deposit?
There are a few advantages to taking out a term deposit, including:
Higher interest.
With a term deposit vs savings account, you’ll typically earn more interest and your rate is fixed for the term of your deposit.
No fees.
There are no monthly or annual fees with a term deposit, so all your interest earnings go straight towards your savings and are yours to keep.
Simplicity.
Term deposits are the epitome of ‘set and forget’ savings. As soon as you choose your term length, you don’t need to do a thing. It’s a great option for those who don’t want to lift a finger or stress about meeting bonus interest criteria.
Reduced temptation.
If you struggle to resist when you see flights to Bali go on sale, a term deposit puts the brakes on you dipping into your savings.
Personalised goals.
We all have different savings goals – some of us may be saving for a holiday while others are saving for a house deposit or renovation. By choosing the length of time your money is invested in a term deposit (1 month to 5 years), you can plan for your future with certainty.
Are there downsides to a term deposit?
Although safe and virtually risk-free, term deposits aren’t for everyone. Here are some things to consider before deciding if a term deposit will suit your savings goals:
Limited access.
Your savings will be locked in a virtual vault – so you can’t withdraw your savings without requesting they be ‘released’.
If you need to access your savings before your term deposit end date, you’ll need to give notice for an early withdrawal (for ME it’s 31 days). The exception to this is if you’re in financial hardship, your interest rate will be reduced for that term.
Fixed rates.
As your rate is locked in, you won’t benefit if market interest rises during your term.
Lump sum only.
You can’t add extra money to your term deposit once it has started.
When a term deposit makes sense
Term deposits can be a handy strategy when you’re saving for something down the track, such as:
- A house deposit: Lock away part of your savings so it’s protected from temptation while you house-hunt.
- Building an investment base: Use it as a secure place to hold funds while you decide on your next investment.
- Preserving capital: If you’ve built up a nest egg and want to protect it while still earning interest.
- Emergency funds: Some people split their safety net between an accessible savings account (for immediate needs) and a term deposit (for true emergencies).
Is a term deposit the right savings strategy for you?
If you’re someone who likes to put away savings every payday (go, you!), a term deposit may not suit you. You can only deposit money into your term deposit at the end of the term. And if you’re someone who suffers from FOMO, term deposits come with fixed rates – so if market rates go up, you’ll miss out.
Term deposits are ideal for long-term savers and for people who want to stash away lump sums of money, such as an inheritance or a bonus from work.
They also require an initial minimum deposit (ME’s Term Deposit is $5,000 minimum) so you’ll need to have some cash saved up to get started.
A term deposit with ME offers certainty, security, and peace of mind – helping you make milestones like buying a home or building wealth a reality.
Start on good terms.
Open a ME Term deposit and see how your savings can grow with competitive rates.
Find out about our term deposits
This article is prepared based on general information. It does not take into account individual financial objectives or needs and is not financial product advice.