How to make your term deposits work harder

Despite continued record low interest rates, there’s still a place for term deposits in an investment portfolio.

In 2011, the average term deposit could earn you around 6 percent per annum. Since then, the times, they have a-changed – and so have term deposit rates.

Since the Global Financial Crisis (GFC) we remain a little nervous around risk, so despite average term deposit rates now being closer to 2.5 percent, they’re included in our portfolios for the capital security and diversification components they offer.

The Reserve Bank of Australia (RBA) sets the cash rate via its monetary policy. The aim is to stimulate the economy by making savings accounts and term deposits unattractive and make borrowing cheap to encourage consumers to spend.

Generally this kind of monetary policy only lasts a couple of years which is why so few economists foresaw the protracted period of low rates we are experiencing.

Term deposits can pay slightly higher rates depending on the length of the term. For example, investment over one year may attract 2.45 percent, while over two years the same investment may attract 2.5 percent.

Bonus saver accounts offer investors more attractive rates but you must read the fine print or better still, seek independent professional advice before committing. You could find that the ‘bonus’ may only apply for a short introductory period then revert to the standard cash rate, potentially lower than term deposit rates.

In other cases, bonus rates are only paid if a regular monthly contribution is made to the savings account.

Many people find these features work in their favour, but there can be traps for the unwary.

So if you’ve done your homework, and term deposits remain the most appropriate fixed interest investment for you, there are a few things you can do to maximise their potential.

Loyalty may get you nowhere
We Australians are a loyal bunch usually letting our insurance policies automatically renew each year – same with term deposits. Each time yours approaches maturity, shop around and see what other term deposits are available that will work better for you.

Eggs and baskets
Consider spreading your allocated funds across a variety of institutions with a staggered range of maturity dates. This might enable you to take advantage of better rates as your investments mature.

Interest payments
Many term deposits offer the earnings as a regular income, sometimes resulting in a lower interest rate. Consider reinvesting the interest for a higher rate, or, if you need some income, set up separate term deposits.

Set and forget
Term deposits are not everyday transaction accounts. While it’s possible to access money before the end of the term, it’s not advisable as heavy penalties apply, including fees and reduced interest rates.

As with any financial decision, it’s important to seek advice from a licensed adviser to ensure you’re getting the best products and the best deal for you.

Ursula Boorman
Ursula Boorman
Ursula Boorman holds a Bachelor of Economics degree, a Diploma of Financial Planning and is a Certified Financial Planner. She has worked in banking and financial services since 1988. Ursula is particularly skilled in developing the financial strategies that enable clients to achieve their goals through her understanding of the way that superannuation, taxation and social security legislation interact with each other. Ursula is passionate about giving clients the confidence they need to take control of their financial situation and provides strategies to help them plan for their future.