If you want to withdraw funds from a term deposit before it matures, you’ll need to be willing to pay the penalty.
A term deposit offers a safe and secure way to invest your money and receive guaranteed returns. However, if you experience a cashflow problem or some other financial emergency and you need to urgently access funds, withdrawing money from your term deposit can be an expensive exercise.
Fees and interest rate reductions apply to early withdrawals from term deposits, so you need to make sure you’re aware of what those penalties are before deciding to close a term deposit ahead of schedule.
What term deposit penalties apply if I withdraw before maturity?
The first thing you need to realise before you make an early withdrawal from a term deposit is that you may have to give advance notice to your bank, usually 31 days. This means that if there’s less than a month remaining on your term, you won’t be able to access the funds in your account until maturity. However, some banks and term deposits do allow early withdrawal requests to be processed immediately, so you’ll need to check the fine print.
Penalties apply when you break the fixed investment period of a term deposit, but the penalty fees are calculated differently from one financial institution to the next. They also have different names depending on your bank, such as prepayment penalties and early withdrawal fees.
Some banks will deduct a percentage of your interest rate based on how much of the term still remains – for example, if the interest rate is 3.50% p.a. but the penalty is 2.00% p.a., you would only earn 1.50% p.a. on your balance.
Others will charge a break fee calculated on a wide range of factors, including the bank’s current interest rates, the rate on your account, and how much money you want to withdraw. You can find more details on the fees and charges that apply to your term deposit in the relevant terms and conditions document from your financial institution.
It’s also worth pointing out that minimum balance limits often apply to term deposits. So even if you are only withdrawing a partial amount, if this reduces your account balance to below the minimum limit, your account could be automatically closed and the interest rate reduction could apply to the entire balance.
Why do banks impose term deposit penalties?
The fixed nature of a term deposit has benefits for banks as well as for customers. When you agree to invest a specific amount of money with a bank for a set period, the bank is more than happy to receive those funds because it can lend them out to home loan borrowers in the knowledge that you won’t need to access your money until the deposit matures.
However, when you decide to break your term deposit and withdraw funds ahead of schedule, you’re breaking the agreement you have with your bank and it will impose penalties to help cover any funding shortfall.
Meanwhile, the 31-day notice period imposed on many term deposits was introduced in 2015 as part of the liquidity coverage ratio (LCR) under the Basel III reforms. These reforms are designed to reduce financial stress on banks, and requires banks to hold enough assets to see off 30 days of financial turmoil.
Term deposit penalties from Australian banks
If you need to withdraw money from a Commonwealth Bank term deposit before the end of the term, you will need to give the bank 31 days’ notice before you can withdraw all or part of your funds. In addition to a $30 prepayment administration fee, you will also be hit with a prepayment adjustment.
The prepayment adjustment applied to your account varies according to the percentage of the original term that has elapsed. The adjustment is calculated on the term deposit balance current as of the prepayment date.
|Percentage of term elapsed||Adjustment to be applied|
|0% to less than 20%||90%|
|20% to less than 40%||80%|
|40% to less than 60%||60%|
|60% to less than 80%||40%|
|80% to less than 100%||20%|
For example, if your funds are invested for half of the agreed term, the prepayment adjustment to be applied will be 60%. So if the agreed interest rate when you opened the term deposit was 5.00% p.a., the interest rate you will earn on the amount that you have withdrawn early will be 40% of the interest rate agreed at the start of the term, in this case 2.00% p.a. Let’s assume you have $5,000 invested in a 12-month term deposit and you wish to withdraw the entire amount:
- If you waited until maturity, you would earn $250 interest.
- If you withdrew funds halfway through the term and were hit with the rate adjustment, you would only earn $100 interest.
Westpac also requires 31 days’ notice when you wish to withdraw funds ahead of schedule, with an interest rate reduction applying based on the same schedule outlined in the above table. In addition, no interest will be paid if a withdrawal is made less than seven days after the term begins.
The early withdrawal fees and interest rate reduction on ANZ term deposits are the same as with Commonwealth Bank, but the 31 days’ notice period doesn’t apply. You can instead ask to withdraw funds immediately, with all requests responded to within two business days.
However, ANZ also offers the Advance Notice Term Deposit which, as the name suggests, does require you to provide 31 days’ notice before you can withdraw funds. In return, an Advance Notice account provides higher interest rates than ANZ’s ordinary term deposits.
You’ll need to give 31 days’ notice if you want to withdraw money early from an NAB term deposit, while you’ll also be paid a reduced interest rate on the amount you withdraw. This rate is calculated based on the percentage of the term that has elapsed, as outlined in the Commonwealth Bank prepayment adjustment table above.
Other fees may also apply, but NAB says these vary depending on the amount you withdraw and on changes to the bank’s cost of funds since you opened your account. Contact NAB for more details.
If you choose to close an ING DIRECT term deposit account early, your funds will be transferred to the nominated linked account 32 days after you get in touch with them, or the next business day where applicable. If you have less than 31 days left on your term, you will not be able to access funds until maturity. However, these times may be waived in the case of financial hardship. If you close your account before maturity, your interest rates will be reduced based on how much time was left in your term, as per the Commonwealth Bank table above. You cannot make partial withdrawals, and can only empty the account.
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Top tips about term deposit penalties
No legal requirement
There is no legal requirement for your financial institution to break your term deposit early, even if you request for this to happen. This may vary depending on the contract you have in place with your bank, but in most cases you will need your provider’s approval before you can withdraw funds early.
The financial hardship rule
If you’re experiencing financial hardship and need urgent access to funds in your term deposit, your bank may waive the 31 days’ notice requirement that applies.
Before you open a term deposit, consider your future financial needs and whether you are likely to need to access your money before maturity. While it’s impossible to predict the future and the emergencies that may arise, you may decide that you may be better off opening an online savings account that provides easy access to funds whenever you need.
Make use of cooling-off periods
Some providers have cooling-off periods that begin immediately after you open a term deposit and run for a short period, allowing you to close your account without incurring any penalties. If your term deposit does include a cooling-off period, make use of this time to consider whether it is the right account for you.
Consider other opportunities
If you don’t want to pay the penalties imposed for breaking a term deposit early, make sure you consider all the opportunities available to find the money you need. Perhaps you could borrow the money from a family member?
Partial withdrawals without penalty
Some term deposits allow you to make a partial withdrawal from your account without incurring a penalty. Keep an eye out for these accounts when comparing term deposits.
Before you open a term deposit, make sure that you’re fully aware of any penalties that will apply if you need to make an early withdrawal.