Have you ever heard of a term deposit? It’s a low-risk form of investment held at a bank or other type of financial institution. Essentially, you open a term deposit account and put your money (aka the “deposit”) away for an agreed rate of interest over a fixed amount of time (aka the “term”).
How much can I deposit?
This will vary between financial institutions. Most term deposits require a minimum sum of $5000, so this is a good number to work with if it’s your first time investing in a term deposit.
What about the term?
The “term” is very important – a customer must understand before investing that their money will remain in that bank account for the pre-determined period (usually 1 month to 5 years) at the agreed interest rate. Typically, you can only withdraw the money once this period has passed. In special circumstances, early withdrawals may happen – but often with a penalty in the form of an interest rate reduction or fee attached.
How is the interest rate determined?
Banks and other financial institutions take into account a number of factors when determining what interest rates they will offer for their term deposits, including:
- The deposit amount
- The term the amount is to be invested for
- How often the interest is paid
- Current market, including competitor rates
The rates that are offered can change daily, which means that a rate available today for a certain amount and term may not be available the following day.
What is the risk?
This type of investment could be very successful for a savvy investor, but as with any investment, there is a risk involved.
You will want to know (or talk to a financial institution that knows) how interest rates work to really negate as much risk as possible. If you’re planning to lock your money away for a term of 12 months or more, you need to consider the return you will be receiving given the likely impact of inflation over the period. As interest rates often fluctuate, you also want to make sure you’re not in a bad position if they go up significantly while your money is locked away, unaffected.
What if I want to access my deposit before the term is up?
We get it, life happens. You may find yourself wanting to access your funds early in case your car breaks down or One Direction finally gets back together, and you need to buy tickets.
If you do need to withdraw funds before the term is up, make sure you’re aware of any interest rate penalty and/or fee associated with this withdrawal before you proceed.
What happens at the end of the term?
If you don’t withdraw, and your term concludes as planned, make sure both you and your financial institution know what you would like to do with your money. The two most common outcomes of a term deposit are: moving the money to another, more accessible account, or re-investing in another term deposit. Financial institutions should be encouraging you to make this decision well ahead of time.
For instance, with Bank of us you will receive a letter in the mail reminding you that you are nearing the end of your term, along with an outline of your options so you can make the decision that is best for you and your investment.
If you are planning to withdraw your funds at the end of the term, it’s good to put a note in your calendar to notify your bank before the term is up. This is important, as if some banks (us included) don’t receive instruction from the customer, the term deposit will be reinvested for the same term. So remember, communication is key!
And that’s the 101 on term deposits. Want to know more? Click here for more information about Bank of us investment accounts.
The small, small print: This is general information only and does not take into account your personal circumstances. Before acquiring any financial product, you should check if it is suitable for your needs and where appropriate seek independent advice.