If you have some savings set aside which you don’t need immediate access to, it may be worth exploring how your money can work harder for you.

Compared with some other savings options, term deposits can give you the confidence of knowing exactly how much money you’ll earn and when you’ll earn it.

This can be helpful when you’re working towards a financial goal, or if you’re looking to lock in a competitive interest rate over a set period of time. Often, term deposits have higher interest rates than regular savings accounts - especially for longer term investments - so it’s possible your savings may grow faster than they would in a regular savings account.

Read on to find out how term deposits work, and how they might benefit your savings plans.

What is a term deposit?

Term deposits are a type of savings account where you invest your money for a fixed period of time, from as little as one month to as long as five years.

Term deposits can be helpful as, unlike some other savings accounts, they offer you a certain return, with a fixed interest rate, and for a defined length of time.

Term deposits can be useful when you’re looking for certainty about what interest rate your money will earn. For example, if it’s your goal to buy a new vehicle but want to wait until the end of the next financial year to grab a bargain in the sales, you might arrange a term deposit that matures around then.

A great benefit of term deposits is that once they’re set up, you don’t need to spend time managing them until they are reaching their term maturity.

When your term deposit matures, you receive the principal amount you originally invested plus interest based on the rate you agreed to at the start. That means you can plan with confidence, because you know what you’ll get at the maturity date.

After your term deposit matures, you have a few options:  reinvest the principal plus interest, reinvest either the principal or interest, or withdraw part or all of your money.

How term deposits work

You can choose the length of time you want the account for and the amount you want to deposit based on your needs. Generally, the more money you put in, or the longer you invest, the higher the interest rate.

When choosing a term, you’ll usually have a range of options, from one month to five years. Interest is generally paid at the end of the term, although could be paid more often on deposits with longer terms. Term deposits have a minimum amount that you can invest, which varies widely.

As there’s nothing to track before the maturity date and your deposit is earning interest automatically, they’re a set-and-forget kind of investment.

Once you’ve reached the maturity date, your deposit can be released. Some financial institutions offer to automatically rollover term deposits. The institution will advise you of the new rate based on rolling over the existing amount and term prior to maturity so you have the opportunity to make a decision. Otherwise when the term ends, you have the option of reinvesting either the whole or a selected amount in another term deposit, maybe for a different term. If you opt for this, make sure to check that the interest rate you’re offered is still competitive on the rollover date.

What’s the difference between term deposits and other accounts?

Term deposits are simpler but less flexible than some other ways to save.

Generally they offer a higher interest rate than an everyday or savings bank account, to compensate for your money being out of reach for a given amount of time (although bonus rates offered on some more flexible accounts may be higher than those on term deposits).

  • They usually come with no set-up fee and no monthly account management fees.
  •  Give you assurance that you’ll get exactly what you expect, if you leave your money in for the full term. It also means that if interest rates fall during that time, you’re likely to do relatively well with a set rate.
  • On the other hand, if interest rates rise, you’ll do relatively less well.
  • Your money is locked away for the full term, so if you need to access it before that time you may have to give notice in advance, and you’ll pay a penalty fee or earn less interest.
  • There’s also no option to top up the amount in your term deposit until the expiry of the term.

How interest is calculated and paid

The interest rate is fixed and guaranteed at the outset and paid at the end of the term. In most cases, you don’t receive the full amount of interest if you access your money early.

Are term deposits safe?

Term deposits may be considered a safer investment than other types of investments such as shares, as they’re not susceptible to market movements or interest rate rises or falls.

Combined deposits up to $250,000 per customer are also protected by the Australian Government guarantee.

Is a term deposit right for me?

That depends on your needs and your savings style.

Term deposits are generally low-risk investments with fixed rates of interest and a guaranteed return. As the return is predictable and you can’t change the amount you deposit once you’ve set it up, they’re less flexible than some other alternatives.

In uncertain economic times, term deposits might be worth considering once you’ve done your homework and worked out what you can afford to put away, and for how long. You could even have a term deposit for part of your savings and a more flexible account for the rest giving a bit of the best of both worlds.

Where to open a term deposit

Most banks, building societies and credit unions offer term deposits. Rates on offer change frequently, so shop around to lock in the rate and term that’s right for you.

Find up-to-date term deposit interest rates and features offered by AMP Bank. You can also use the online calculator to estimate your rate of return over different time periods and levels of investment.

AMP Bank offers flexible savings accounts

What you need to know

The credit provider for all banking products is AMP Bank Limited ABN 15 081 596 009, AFSL and Australian Credit Licence 234517. Approval is subject to AMP Bank guidelines. Terms and conditions apply and are available at amp.com.au/bankterms or by calling 13 30 30. Fees and charges are payable.

Any advice and information is provided by AWM Services Pty Ltd ABN 15 139 353 496, AFSL No. 366121 (AWM Services) and is general in nature. It hasn’t taken your financial or personal circumstances into account.

It’s important to consider your particular circumstances and read the relevant product disclosure statement, Target Market Determination or terms and conditions, available from AMP at amp.com.au, or by calling 131 267, before deciding what’s right for you.

You can read our Financial Services Guide online for information about our services, including the fees and other benefits that AMP companies and their representatives may receive in relation to products and services provided to you. You can also ask us for a hardcopy.

All information on this website is subject to change without notice. AWM Services is part of the AMP group.