What is a Term Deposit and How Does it Work?
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What is a Term Deposit and How Does it Work?

Angelica Silva

Angelica Silva

26/03/2021 • 5 minute read

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Between groceries, travel, rent, and trying to maintain some kind of social life – we know, saving your hard-earned cash is no easy task! Yet, there’s never been a better time to sort out your finances and find effective ways to protect your money. If you’re looking for a new way to make your savings grow, a term deposit could be a great option for you.

As the saying goes: short-term pain leads to long-term gain. Oiyo is here to help you navigate term deposits and whether they could be a good fit for you. 

What is a term deposit?

Basically, a term deposit is a deposit account where you put away a certain amount of money for an agreed length of time. This is what’s known as “the term” and means you cannot access the money until the term is up. The plus side? You’ll receive a guaranteed rate of interest for the term you select, so you’ll know exactly what the return on your money will be. 

The best way to think of a term deposit is as a savings account – you put a specified amount of money into it for a set amount of time, at a set interest rate. At the end of the term, you’ll get your original investment back. 

Typically, the length of the term varies from one month to five years. The interest rate you get will depend on the investment amount, as well as the provider and market rates. 

Is a term deposit a good investment?

Naturally, that ultimately depends on your personal situation and what kind of return you’re looking to make. If you struggle with the temptation to dip into your savings, a big advantage of a term deposit is that your savings are locked away. This makes it easier to fight those temptations to spend your savings. With everything agreed upfront, term deposits are a straightforward way to invest for a fixed amount of time. A few other pros are:

  • The certainty of a competitive fixed interest rate to maximise your savings 
  • Depending on your term, the option to earn a regular income from your investment or have it compounded for faster growth 
  • Convenient set up and reinvestment with online banking
  • For terms one year and over, you may be able to access up to 20% of your investment without losing any interest

Term deposits are one of the lowest-risk investments, particularly because the government guarantees them up to $250,000 with an Authorised Deposit-taking institution (ADI), such as a bank.

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Key takeaways:

  • A term deposit is like a savings account where you choose: the amount of money that goes into it, the amount of time it stays in it, and the interest rate.
  • For terms one year and over, you may be able to access up to 20% of your investment without losing interest.

What are the risks?

Of course, with all the positives of having your money safe and locked away for a rainy day, there are a few risks that come with this. On the chance that you do need to access your money straight away, you’ll need to give up to 31 days notice and will likely have to pay a penalty fee. So, it’s important to make sure you’re certain you won’t need access to your money while it’s locked away.  

Another thing to consider is that locking into a fixed interest rate can potentially have a downside, as you won’t be able to take advantage of a better rate while your money is locked in the term deposit. In saying that, it’s important to keep your options open when your term deposit comes to an end, as some term deposits may automatically renew to the current rate at that time, which may be higher or lower.  

What exactly do I need to be considering?

If you’re weighing up the pros and cons of term deposits, here are a few key points to consider and some questions you may want to look into:

Interest rate
  • What is the interest rate?
  • When is interest paid? Monthly, annually, or at maturity?
Time frame
  • How long can I invest for?
  • Do interest rates change with different investment time frames?
Amount invested
  • How much money do I need to open a term deposit?
  • How much will the interest rate change the more I invest?
  • Are there set-up or exit fees?
  • How big is the penalty fee if I need to access my money early?

Ultimately, if you’re only planning on putting away a small amount of money for a few months, a simple savings account may do the trick. However, if you’ve got some extra cash and time, a fixed rate could protect you from fluctuations in interest rates. Before deciding, make sure to seek independent financial advice to check that a term deposit is right for you.

I’m interested! How do I apply for a term deposit?

Applying for a term deposit is pretty simple and straightforward. It’s basically the same as applying for a normal bank account, and it’s even easier if you’re applying to your existing bank or financial provider. Once you have a solid idea of the amount of money you want to invest and the rate you’d like to lock in, generally, all you have to do is fill out an application form. Thankfully, this can be done without even stepping foot into a branch. Majority of banks have this form online for you to fill out in the comfort of your own home. 

Whether you’re just starting your journey to budgeting, or looking for new ways to save some extra money and smash some goals, we at Oiyo are focused on kick-starting tough conversations about money. So, if you enjoyed this article on term deposits and want to learn more, check out the rest of our Banking for Beginners articles for more helpful tips.


Oiyo is a consolidated online resource, we are not financial advisors. We work with a range of industry professionals and compliance check our articles to ensure factual accuracy. However, we do not provide professional financial advice. Consider seeking independent legal, financial, taxation or other advice to check how the information and ideas presented in this article relate to your unique circumstances.

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Angelica Silva

Written by Angelica Silva

Angelica Silva is a contributing writer for Oiyo. Over the years, Angelica has worked as a journalist for a range of publications with her work appearing in SBS, Business Insider, and Brown Girl Magazine. She has a Bachelor of Journalism and Arts from the University of Queensland.

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