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What is a term deposit and how does it work?

Posted 04.06.2018
What is a term deposit and how does it work?

A term deposit is a short or long term investment where your money is guaranteed a certain interest rate. A term deposit is the kind of account where you put your money into the account and leave it, short or long term, as you have arranged with the bank. You cannot touch the money for a pre-determined time and during that time, you get a fixed interest rate. This interest rate does not change, even if the market goes through a dip.

With a term deposit you have the security of a fixed interest rate and you also have the security of money in the bank. A term deposit is a good investment for two reasons.

  1. You cannot touch your cash, i.e. you are forced to save it.
  2. Your interest rates stay stable, i.e. they cannot decrease.

Is a term deposit a good investment?

A term deposit can only be a good investment because it is a sure investment. You know you are going to get a stable return on your investment without any risk. Your interest rate is locked in for the entire ‘term of your deposit.’ This means if the market drops, your interest rate does NOT drop with it. Also, because you are not able to touch your money for the ‘duration of your term’, you are forced to save that money.

Who should look at term deposits?

A term deposit is a sure way of investing your money. If you have extra cash that you know you will not need to use for a while, it makes sense to do a term deposit. If you think you may need to access that cash shortly, or urgently, then a term deposit is not for you. The good thing about a term deposit is that you know it will work and you know that at the end of the term, you will have money.

How long should I term deposit be?

There are short term deposits and long term deposits and between you and the bank, you can choose for what length of time you should ‘lock away’ your money. If you have a lot of money at your disposal and you won’t need access to the money you are investing for a while, go for a long term deposit. If you may need the money in the next few months, go for a short term deposit.  The length of time you leave the money in the account depends on the investment deals that your bank or lending institution are offering. You may need to negotiate terms with them. You can look at short or long term investments and you must discuss rollover terms too. This means when your term deposit has come to an end, you have the option of extending it.

Ensure a good interest rate from the beginning

Because a term deposit means your money is ‘locked’ at a certain interest rate, you do need to make sure you get a good interest rate from the beginning. While you are safe if the interest rates drop, if interest rates increase, you do not get the benefit of them. For your term deposit to work for you, you want the best possible interest rates from the start.

What happens if increase rates increase?

The way a term deposit works is that your interest rates are set for the duration of the investment. You do not benefit from interest rate increases but remember, you do not suffer from interesting rate decreases either.

Who offers term deposits?

Most banks and financial institutions offer term deposits. You need to sit with your bank manager or investment advisor and ask how does a term deposit work.  You can compare the various term deposits at different institutions and make sure you get the best interest rates from day one. Your institution should explain to you what is a term deposit, and why it is the best investment for you to make. Remember, your money can only grow with a term deposit. It is a safe investment and it is a low risk investment. You may not make as much interest as with a more risky investment or account, but your interest rate will never drop.

How does one apply for a term deposit

Applying for a term deposit is really simple. You are not asking a bank for money, you are asking a bank to invest your money. The service should be fairly uncomplicated. You will need to fill out a few forms, give your bank details, your tax number and your ID. A good bank or lending institution will do the paperwork for you, but they will talk you through the process so you understand your investment every step of the way.

Compare term deposits

If you’re interested in investing your money into a term deposits, you can compare our term deposits here: