Term deposit vs savings account: what’s the difference?

Term deposits

Term deposits work by locking your money away for a certain timeframe (or ‘term’) in exchange for a fixed interest rate return at the end of that term. A general rule of thumb is the longer the term, the higher the interest rate. Terms vary, but usually range from as short as one month to as long as five years.

They’re worth considering if you’re looking to get an exact amount by a certain date, and don’t need to access the money before the agreed term ends.

Pros

• There is more certainty involved with the return on term deposits than most savings accounts as the interest rate is guaranteed.

• Usually, these accounts come with no set-up fee. They often offer a higher rate of return to compensate for your money being out of reach for the entire duration of your term.

• They’re a set-and-forget way of saving, so you don’t need to worry about fluctuations in the Reserve Bank of Australia’s (RBA) cash rate.

• If interest rates fall during that time, you’re likely to do relatively well with a locked-in rate.

Cons 

• If the cash rate rises, you won’t be able to obtain the benefit of that increase for your term deposit.

• Your money is locked away for the full term.

• You’ll have to give notice to access it early, usually around 31 days.

• You’ll have to pay a penalty fee or earn less interest if you take your money out before the end of the term.

• A minimum initial deposit is required, which can vary widely.

• There’s no option to top up funds once you’ve opened a term deposit.

Interest rates on term deposits 

With a term deposit, the length of the term has a corresponding interest rate. You can choose the term, or the length of time you want the account for and the amount you want to deposit based on your needs.

When should I open a term deposit? 

Term deposits can be useful when you’re looking for certainty about the rate of interest your money will earn. So, if your goal is to buy a car but you want to wait until the end of the next financial year to grab a bargain, you might plan for a term deposit that matures around then.

Savings accounts

Savings accounts are more flexible than term deposits. A savings account can be useful when you want to put your money away and have it earn some interest with the peace of mind that you can also access your funds as and when you need to.

Pros 

• You can deposit or withdraw money at any time.

• You may be able to link to an everyday transaction account.

• Interest rates may rise, giving you a greater return on your initial deposit.

Cons 

• Interest rates may fall, giving you less than you expected at the outset.

• If you withdraw funds you may lose interest for that month, or whatever length of time applies to your account.

• You may be required to make minimum monthly deposits to earn bonus interest rates.

• You may need to maintain a certain balance to avoid any potential fees or loss of interest rate benefits.

• Some savings accounts may limit access to money to encourage you to save, through no debit card or ATM access

Interest rates on savings accounts

Standard savings accounts usually offer low fees and immediate access to your money, but you may get a lower interest rate compared to a term deposit.

Interest rates are quoted per annum, applied as a percentage to the money you have in your savings account on a daily basis, and credited monthly.

As the name suggests, high-interest savings accounts typically have higher interest rates, but there may be penalties for withdrawing your money before a set period of time has passed, or if you don’t meet the required number of debit card purchases or ongoing minimum deposit requirements.

What to consider before opening a savings account?

There are a number of things to consider:

• fees charged

• interest rates

• how accessible your money is

• whether you can set up an automatic direct debit, and

• whether there’s a minimum amount you need to deposit each month.

There’s a variety of savings accounts in the market so use this checklist to help find the right savings account for your situation.

How fees compare 

Term deposits usually come with no set-up fee. However, if you need to withdraw your money before the maturity date, you’ll likely have to give notice in advance of your withdrawal and pay a fee or earn less interest.

Some savings accounts attract set-up fees and may also include anything from monthly account keeping fees to withdrawal fees.

So, when it comes to comparing accounts, make sure you’re across any potential fees or charges your provider may apply to your account.

Source: AMP May 2022

Important:
This information is provided by AMP Life Limited. It is general information only and hasn’t taken your circumstances into account. It’s important to consider your particular circumstances and the relevant Product Disclosure Statement or Terms and Conditions, available by calling 02 6947 2866, before deciding what’s right for you.

All information in this article is subject to change without notice. Although the information is from sources considered reliable, AMP and our company do not guarantee that it is accurate or complete. You should not rely upon it and should seek professional advice before making any financial decision. Except where liability under any statute cannot be excluded, AMP and our company do not accept any liability for any resulting loss or damage of the reader or any other person. Any links have been provided for information purposes only and will take you to external websites. Note: Our company does not endorse and is not responsible for the accuracy of the contents/information contained within the linked site(s) accessible from this page.