Term Deposit Guide

What is a term deposit?

A term deposit is an investment held at a financial institution for a fixed amount of time, called a term. The money is held for a pre-determined period, typically from one month to five years, with a fixed interest rate for the agreed period. In most cases, the money can only be withdrawn at the end of the term or if it is necessary to access it earlier, penalties apply. The penalties may be partial or full forfeiture of the interest the term deposit would have earned.

What are the main types of term deposits?

Short Term Deposits

If you have a short term savings goal or you don’t want your savings locked away for too long, a short term deposit can last anywhere from one month to one year.

Pros

  • It’s not as large a commitment as a long term deposit. People who think they might need to access their funds in the near future might be more comfortable locking them away for a short term rather than long.
  • It can be a way of meeting short term savings goals, for example an upcoming holiday or new car.
  • There’s less chance of being stung by early withdrawal fees. If the money is needed unexpectedly, it’s easier to wait out a short term and avoid early withdrawal penalties than it would be with a longer term.
  • If market interest rates rise, there are more frequent opportunities to reinvest or add more money to the term deposit balance and reinvest for another term./li>

Cons

  • Shorter terms usually offer a lower interest rate.
  • As a short term ends, it can be tempting to withdraw the money and spend it.
  • It’s not as low maintenance. The shorter the term, the sooner the decision of reinvesting will roll around.
  • If you choose to let the deposit roll over, you could lose a competitive interest rate if market rates have changed.

Long Term Deposits

A longer deposit, lasting between one and 10 years, can work for savers who have long term goals. It could also be useful for people who have a lump sum, such as a work bonus or inheritance, which won’t be needed in the near future.

Pros

  • Longer term deposits often pay higher rates than short terms.
  • The interest rate will be locked in for a long time. If market rates drop, the interest on your investment will remain the same for longer.
  • It can help with saving for long term goals, as the investment will be hard to access without harsh penalties

Cons

  • If market rates rise, your investment will be locked into the lower rate for the term.
  • The long term commitment means the funds can’t be accessed for emergencies or unexpected expenses, without paying penalties.
  • It requires careful planning to ensure you can afford to have the funds locked away for a long time without being touched.

How do I apply for a term deposit?

Here are the important things you’ll need when applying to open a term deposit:

Contact Details

Whether you’re applying online or inhouse, you will need to provide at least your phone number and email address when you open a term deposit. Give accurate details and update them when necessary, as the bank will need them to remind you when your term deposit is about to mature.

Identification

Photo ID will usually be required, such as driver’s licence, student ID or passport, particularly if you’re new to the bank. One of the reasons for ID is proof of age. Different banks have different minimum age limits for opening a term deposit, although most are lenient and some offer special accounts for children.

Member number

If you bank with a Credit Union, you will need to supply your member number. If you’re not a member already, you’ll need to sign up. Be aware, this might involve a membership fee.

A bank account

This is the account where the interest from your term deposit will be paid. If you’re opening a term deposit at a different bank to the one you usually bank with, check if your new provider will pay the interest into your old bank account. Some may require you to open a savings or bank account with them when you open a term deposit.

A desired term

By now you will have carefully considered the different types of term deposits available.

The important things to think about are your budget and your plans for the future. Make sure you’ve chosen a term you can work around to avoid unnecessary early withdrawals.

Minimum deposit

You’ll need the lump sum available of the amount you have decided to deposit, in line with the term deposit you have chosen. Make sure you think through which term deposit is best for you and have at least that amount of money available before you apply.

A future savings plan

When your term deposit matures, you’ll need a plan in place for what to do with the funds, whether you want to withdraw the money or reinvest it for another term. Make these arrangements with your provider so you both know what your money will be doing when your term comes to an end.