With fixed-interest rates and the backing of the government guarantee, term deposits are one of the safest investments available.
When deciding where to invest your money, your tolerance for risk is one of the most important factors you need to take into account. While some people are willing to accept a higher level of risk in return for potentially greater rewards, others prefer the security of a safe and reliable investment.
If you’re looking for a stable and secure investment opportunity, term deposits could be the perfect choice. Let’s take a closer look at term deposits and why they can be the perfect choice for anyone looking for a low-risk investment.
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What are term deposits?
A term deposit is a type of savings account that pays a fixed rate of interest on the money you invest. You choose the length of time to invest your money, with terms ranging from 1 to 60 months available, and you can’t access your money during that term without incurring significant costs.
The main benefit of term deposits is that they provide a guaranteed return on your investment. The fixed-interest rate means you can enjoy secure and reliable returns while account-access restrictions remove the temptation to spend your savings.
How safe are term deposits?
Term deposits are one of the safest investments around. Unlike other investments, for example shares or property, there is basically no risk of losing the money you deposit. There are no establishment or ongoing service fees attached to term deposits (unless you withdraw your funds early), so you don’t have to worry about hidden fees and charges eating away at your savings balance.
These accounts allow you to earn a competitive interest rate on your account balance, and because the interest rate is fixed, you don’t have to worry about falling interest rates harming your saving power. This also means that you can calculate exactly how much interest you will earn on your term deposit, allowing you to budget for future expenses and investments ahead of time.
In short, term deposits offer a great way to park your money somewhere safe and let it grow. There’s no ongoing account management required and virtually no risk attached to your investment.
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What protection does the Australian Government Guarantee provide?
Term deposits also offer an additional benefit: they’re protected by the Australian Government Guarantee. Under this arrangement, deposits of up to $250,000 placed with an Authorised Deposit-taking Institution (ADI) are guaranteed by the Australian government. In other words, if the financial institution with which you open a term deposit gets into financial trouble and collapses, you won’t lose any money.
This $250,000 cap applies per person and per ADI. You can obtain a list of ADIs from the Australian Prudential Regulation Authority (APRA), but it includes most major Australian banks, building societies and credit unions.
Benefits of term deposits
There are several reasons why term deposits are so safe:
- The interest rate is fixed. The interest rate on your account is fixed for the duration of the term, so even if the Reserve Bank lowers the official cash rate, your deposit won’t suffer.
- Guaranteed returns. A fixed-interest rate means you know ahead of time exactly how much interest you will earn.
- You can’t dip into your savings. There are access restrictions in place to make it difficult to withdraw your money before the deposit matures.
- There are no fees. There are no establishment or ongoing fees to chip away at your savings.
- Your money is protected. Deposits of up to $250,000 are protected by the Australian Government Guarantee, which means there is basically no risk of losing your money.
Are there any term deposit risks I should be aware of?
Although term deposits are a safe and secure investment, they’re not without risks. Common risks to be aware of include the following:
- Your money is locked away. It can be costly to access your term deposit funds before your account has matured. Early withdrawals incur fees and interest rate deductions. Also, you can’t top up your deposit with extra funds. With this in mind, locking your money away in a term deposit can be a risky move if there’s a chance you may need to make any deposits or withdrawals before maturity.
- Advance notice required. Some banks require you to provide advance notice (31 days on new deposits) if you want to withdraw funds before maturity. Keep this in mind if you’re ever likely to need urgent access to the money in your term deposit.
- Automatic rollover. Unless you specify otherwise, many banks will automatically rollover a matured term deposit into a new term deposit. The new account will feature the same investment term, which may no longer be suitable for you, and you will receive the current interest rate available from your bank for that specific term. However, there may be better rates available from other banks if you shop around, so make sure to compare your options before accepting an automatic rollover.
- Higher interest rates available. You may be able to access higher interest rates on other types of savings accounts, such as online savings accounts or bonus saver accounts.
- You can’t take advantage of interest rate rises. While investing your money in a term deposit protects you against falling interest rates, it also means you can’t take advantage of any rate rises that occur. So if you lock your money away for an extended term, you run the risk of missing out on substantially better returns elsewhere.
Compare term deposits with a wide range of other savings accounts to decide whether they’re the right place for you to park your money.