Thinking of opening a term deposit this year? 3 things to consider first
Term deposits have many benefits, but there are also a few things to be aware of.
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With rising interest rates and increased volatility in the share market, many people are once again turning to term deposits as a safe, reliable way to earn a return on their money this year.
If you've never used a term deposit (or it's been a while since you have), here are a few things to know about them before you open one.
1. Term deposit rates have gone up
It's no secret that term deposit rates, along with savings account rates, have been low for the past few years. This was a result of the official cash rate, which was reduced to an all-time low of 0.10% and stayed that way for the better part of 2 years.
While a low cash rate was good news for people with mortgages, it wasn't the best for people looking to earn a return on their cash in the bank. But this is all changing now.
The RBA has already lifted the cash rate twice this year, and term deposit rates have been on the way up as a result. While a term deposit rate above 1% or 2% was virtually unheard of throughout 2020 and 2021, there are now options available above 3% (or even higher!).
You'll generally find these good rates on longer term lengths. For example, MyState has just increased its 24-month term deposit rate to an impressive 3.35% p.a. If you're looking for a slightly shorter term, the bank is also offering 3.05% p.a. on 12-month term deposits and 2.50% p.a. on 9- and 10-month terms.
The thing to keep in mind with term deposit rates is that they're fixed, which means they are locked in for the duration of the term. A fixed rate could offer some certainty in this volatile market, and also makes it easier to understand your exact return on investment so you can plan accordingly.
2. There are short-term options available
Sometimes when people think of term deposits they think they need to lock their money away for years at a time. Yes, there are term deposits available for 3, 4 or 5 years and these could suit you if you're looking for a long-term, set-and-forget, safe investment.
However, locking your money away for years at a time isn't going to be the right choice for everyone and there are also many shorter options available.
Many banks offer term deposits for as little as 1, 2 or 3 months. This could be a good option for you if you want to lock in a good return on your money for the short term while you're in between investments, figuring out what you want to do with your money, or simply not sure if you can go a longer period without access to your cash.
One good thing about opting for a shorter term option is that, when the term reaches maturity, it will usually just roll over into another term of the same length (unless you choose otherwise). By doing this, you can also take advantage of any additional rate increases that have happened during your term, as the new rate will be applied to your new term deposit.
Keep in mind that shorter terms usually come with lower interest rates too, although some banks will offer special rates for particular terms. For example, MyState will be offering 2.00% p.a. on 5-month term deposits, which is even higher than the rate it's offering on its 11-month term deposit.
3. There are no ongoing conditions to meet
If you're currently using a high interest savings account to earn a return on your cash, you're probably used to having to meet some conditions each month to earn interest. For example, many savings accounts require you to deposit a certain amount of money each month and make a set number of purchases.
This isn't the case with term deposits. When you open a term deposit, you'll earn a fixed interest rate and there's nothing more to do until the account reaches maturity. It's a hassle free, set-and-forget option.
That said, it's important to remember you can't access your money whenever you need to like you can with a savings account. So keep this in mind before you put all of your savings into a term deposit – it's a good idea to leave enough money out for unexpected expenses.
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