Term deposits: locking savings away on purpose

A term deposit is savings parked with a bank for a set time at a fixed rate: in Moneysmart's definition, money invested in an account with an authorised deposit-taking institution — an ADI, the licence class covering banks, building societies and credit unions — for a term you choose, usually somewhere between one month and five years. There is usually a minimum amount to open one, and the interest lands monthly, annually or in one sum at maturity — the day the term ends and the money comes free — with that timing among the features Moneysmart says to compare.

The fixed rate is the whole product. For the length of the term it cannot move against you — and cannot move for you either; both directions of movement have been swapped for one known number. That is precisely the job Moneysmart describes: term deposits "can be useful when saving for bigger items like a car", or whenever "you want to be certain about the interest you'll earn". The pricing has a shape too — in Moneysmart's description, the rates on offer generally step up with bigger deposits and longer terms. The bank is buying your commitment, and pays more for more of it.

The alternative is the at-call savings account — at call meaning the money is reachable whenever you want it. Moneysmart describes these as paying more than everyday transaction accounts, usually online and without a debit card, "so it's not as easy to dip into your money" — harder to spend, but never locked. Their headline rates come with homework, though: many pay a bonus rate only while you meet conditions such as regular deposits or a minimum balance, and some advertise a short-lived "honeymoon" rate that steps down once the introductory period ends (see Bonus interest). None of these prices is a law of nature — banks set them, and how they set them mattered enough that in 2023 the Treasurer directed the ACCC to run a retail deposits inquiry into exactly that. Moneysmart's own advice is blunt: always shop around first.

The lock is real. Need the money before the term ends and, per Moneysmart, three tolls can apply: a penalty fee; interest cut back to "a proportion of the interest earnt, or none at all"; and notice — you may have to wait up to a month after asking before the money actually moves. Which tolls apply, and how heavy they are, live in the terms and conditions. They were fixed the day you signed, which makes the day you sign the day to read them.

That single fact settles an old question: the emergency fund — the buffer that absorbs the dying car and the cracked tooth — does not belong in a term deposit. Emergencies don't give notice, and a buffer that pays a fee and forfeits its interest on the way out isn't a buffer, it's a smaller buffer arriving late. Keep the emergency money at call, and lock only dollars whose calendar you already know.

Seen the right way round, though, the toll is also the point. An at-call saver is merely "not as easy to dip into"; a term deposit is genuinely hard to raid — and for money with a job and a date, hard-to-raid is a feature you are choosing on purpose. The test before locking is one question per dollar: could I plausibly need this before the maturity date? Any yes means a shorter term, or no term at all.

Term deposits end with a default, and the default is another term deposit. Moneysmart's warning deserves quoting whole: "If you do nothing, your term deposit may roll over into a new term deposit." The new lock "could also have a lower interest rate than before", and "there may be a fee to get your money out" of it. Silence, in other words, can re-commit your money on terms nobody actively chose — least of all you.

The countermeasure is scheduled attention. Moneysmart's instruction: "Review your term deposit a month before it matures. Compare it with other products to make sure you're getting the best deal." The rate that won your money last time earned nothing permanent — banks reprice, and the deal that was best at opening is merely one contender at maturity. Treat the maturity date as a deadline, not the start of a think-it-over window: the safe assumption is that silence re-locks, so act before the date, not after it.

Practically, this is a two-minute system. The maturity date is known the day the money goes in — so that is the day it goes in the calendar, with the review set a month ahead. When the reminder fires, re-run the original comparison — rate, term, amount, fees, across providers — and then tell the bank one of three things: pay it out, roll it on terms you have actually chosen, or move it to an at-call home. All three are fine answers. The only bad answer is the one the default gives on your behalf.

The lock's home ground is money with a known job and a known date. Moneysmart's example is "saving for bigger items like a car"; the sharpest version is the nearly-finished house deposit — a sum that must exist intact on a date you can already name, where a rate that cannot fall and a balance you cannot raid are both exactly what you want. Know the date, and the term can be fitted to it like a sleeve.

Two honest costs ride along with the certainty. If at-call rates rise while you're locked, you keep your fixed number and watch — the same fixedness that protects you when rates fall is what excludes you when they rise; certainty cuts both ways by construction. And a single term deposit concentrates the whole re-decision on one date. Nothing forces that shape: split a sum across several deposits of different lengths and the maturities arrive in instalments — a ladder, in the common shorthand, meaning staggered terms with staggered exits — so some money is never far from a door, and no single day's rates decide everything. That is arithmetic about dates, not a recommendation.

Last, the safety facts, in their source's shape. Deposits with an ADI — term deposits included — are protected by the Australian Government's Financial Claims Scheme, which guarantees deposits up to a capped amount in the unlikely event the bank, building society or credit union fails; the current cap and conditions live on Moneysmart. The protection attaches only to genuine ADIs regulated by APRA — which doubles as Moneysmart's scam warning: an offer calling itself a term deposit from anything not on APRA's list isn't a term deposit, whatever the rate says. The checking habit lives in Scam safety.