What are term deposits and how do they work?

This means you can remove the temptation to dip into savings and make sure the interest rate doesn't change, despite ups and downs in the market.

How long is a term?

The length of the term can vary from 1 month to about 5 years. The interest rate will change depending on factors including:

• How much you’re able to deposit
• What the current market rates are
• Whether you'll earn simple or compound interest
• How often that interest is paid

What’s useful about term deposits?

If you're often tempted to dip into savings, term deposits will stop you from being able to do so. And if interest rates on savings accounts are going down, a term deposit allows you to set a rate for a specific term.

What to keep in mind

• Interest rates go up and down

If you plan to lock your money away for a few years, the interest rate will need to be higher than the rate of inflation. Interest rates often go up and down, and if they go up, you won’t get the benefit.

• The length of the term

Consider how long you'll put money in a term deposit. If interest rates go up, you're unable to take the money out and put it in a higher interest earning account. But at the same time, you may get a higher interest rate if you put money in a term deposit for longer.

• Should you invest elsewhere?

Term deposits are a safe way to lock away money. But you could earn more by investing it elsewhere. You may be able to earn more money by investing in property or shares, but are at greater risk of losing it. 

• Fees and end of term arrangements

If you need to access your money earlier than you expect, it's likely you'll need to pay a fee and an interest adjustment. You'll also need to tell the bank what to do with your money once the term is up. Otherwise they may put it in a holding facility, where it could earn minimal interest.

• When interest is paid

When you’re choosing your term deposit, check what the interest rate is and whether interest is paid monthly, periodically or just at the end of the term. Some sites have calculators that can help. Before you lock all your savings away, consider putting some of it in an accessible rainy day fund.