Term deposit interest rates can vary widely, and the term length (how long you lock your money away) plays a large role in determining the interest rate offered. This article explores how and why interest rates vary across different term lengths.
Short-term deposit rates (3-6 months)
Short-term deposits, typically ranging from 3 to 9 months, may offer a balance between flexibility and competitive interest rates. Short-term term deposits may be suitable if you think you might need access to your money sooner rather than later, but still want to earn some interest while it’s locked away. These shorter terms are, on average, often surprisingly competitive.
Medium-term deposit rates (6-12 months)
If you’re looking for a balanced mix of return and commitment, medium-term deposits, typically lasting from 6 to 12 months, are often considered the “sweet spot”. This term range tends to offer some of the best term deposit rates in Australia without locking your money away for too long.
For many savers, a 12-month term is a good balance. It allows you to secure a relatively high rate while only committing your funds for a year. In today’s market, medium-term deposits are often where you’ll find the best term deposit rates.
Long-term deposit rates (2-5 years)
If your goal is to save for the long haul, term deposits with a duration of 2 to 5 years may offer a mix of stability and peace of mind. Long-term deposits may not always have the highest rates, especially compared to medium-term options, but they do provide certainty in an uncertain economic climate.
Choosing a long-term deposit may be a suitable move for those who prefer a less active management approach. By locking in a rate for several years, you protect your money from potential downturns in interest rates, keeping a steady return even if the interest rates fall.
Trends to watch for the best term deposit rates
When looking for the best term deposit rates, it can be helpful to understand some key trends that may affect the interest you’ll earn
-
Peak rates in the medium term. The most competitive rates are usually in the 6 to 12-month range. This may reflect some ADIs’ preference for holding onto funds for a manageable period, which can benefit savers looking for good returns without committing for too long.
-
Slight decline in long-term rates. You might notice a downward curve in rates once you move past the 1-year mark. While this isn’t always the case, it typically reflects the relative cost to the bank. However, these rates can still provide value if you prioritise stability over short-term returns.
-
Short-term competitiveness. Interestingly, some shorter-term deposits, like 3-month options, can offer rates that are just as competitive as those in the medium term. This may be a suitable term deposit length if you don’t want to tie up your money for too long.
Additional term deposit rate considerations
While interest rates are important when choosing a term deposit, there are a few other factors to keep in mind to help secure the best deal for you
-
Minimum deposit requirements. Some ADIs might require a higher minimum deposit to access their best rates. Be sure to check if the amount you want to invest meets the ADI’s criteria.
-
Frequency of interest payment. Depending on the ADI, interest might be paid monthly, quarterly, annually, or only at the end of the term. If you’re relying on interest payments as part of your income stream, the payment frequency can be an important detail to consider.
-
Early break costs. Term deposits are designed to lock away your money for a set period at a fixed interest rate, so withdrawing early can lead to early break costs like a reduction in the interest or returns paid to you. This may be waived in cases of proven financial hardship. Be sure to understand what the potential early break costs are before committing.
Looking at the bigger picture
Term deposits typically offer a higher interest rate than most transaction and savings accounts, making them a potentially attractive option for risk-averse savers.
However, rates can fluctuate based on a range of factors, including decisions made by the Reserve Bank of Australia regarding the cash rate.
Economic conditions, inflation trends, and competition among ADIs also play a role in how these rates move. The most important thing is to match your term deposit choice with your personal financial goals and liquidity needs.
Important Information
© Judo Bank Pty Ltd ABN 11 615 995 581 AFSL and Australian Credit Licence 501091 (Judo). The Information on this page (Information) does not constitute personal, legal, investment, taxation, accounting or financial product advice, is provided for general information purposes only, and has been prepared without taking into account your objectives, financial situation, tax position or needs. It is subject to Judo’s disclaimer at www.judo.bank.
Before acting on any Information, you should consider whether the Information is appropriate for you having regard to your objectives, financial situation and needs. You should seek independent financial advice and read the relevant terms and conditions and relevant product documents before acquiring any product.