Breaking a term deposit early

A term deposit is a contract to leave a fixed sum with a bank for a fixed period at a fixed rate. The bank prices it on the assumption the money stays put, which is why it can offer certainty a savings account cannot. Withdrawing before maturity breaks that contract, and every provider sets terms for doing so.

The first of those terms is notice. Most Australian banks require up to 31 days’ notice of an early withdrawal, and that clock starts when you lodge the request, not when you first ring up. Some providers release funds faster at their discretion, and some do not. Treating a term deposit as an emergency fund is where this catches people out most often, because in a genuine emergency the money may be a month away.

The notice requirement is generally waived in cases of demonstrated financial hardship, and providers also make exceptions for events such as the death of an account holder. Hardship is assessed case by case, so it is a safety valve rather than an option you can plan around.

The standard mechanism is a reduction to the rate you earn, applied across the whole period the money was invested, and scaled to how far through the term you are. Break in the first fifth of the term and the reduction is severe. Break with most of the term behind you and it is mild. A small administration fee sometimes applies on top, but the rate reduction is where the cost sits.

Providers publish this scale in the product terms, and while the exact percentages differ, the shape is consistent across the market. A typical schedule reduces the rate by around 90% when less than 20% of the term has elapsed, easing to around 20% once you are more than 80% of the way through.

One detail deserves attention on longer terms. If your deposit pays interest annually or semi-annually rather than at maturity, and you have already received a payment, the bank will normally recover the excess by deducting it from the capital returned to you. Your capital is not being penalised, it is being reconciled, but the amount landing in your account can still be less than the round number you deposited.

Almost every early withdrawal is caused by the same thing: one large deposit, one date, and life happening in between. The structures below are set at the start and cost nothing to put in place.

• Splitting the deposit. Four deposits of $25,000 instead of one of $100,000. If $25,000 is needed in month five, one is broken and the other three run untouched at the full rate.
• A ladder. Terms are staggered so that something matures every three or six months. A portion of the money becomes available regularly without breaking anything, and part of the balance re-prices as rates move.
• An emergency fund held elsewhere. A savings account paying slightly less is available the same day, and the rate difference is usually smaller than a single break penalty.
• A shorter term. Six months carries less risk of a break than a marginally higher 12-month rate when the time horizon is uncertain. When the market expects rate cuts, short terms sometimes pay more anyway.
• Partial withdrawals. Many providers, including several of the major banks, allow part of a term deposit to be withdrawn, penalising only the amount taken. The product terms say whether this is allowed.

More money is lost at the end of a term deposit than in the middle of one. When a deposit matures, many providers will roll it over automatically into a new term of the same length unless you tell them otherwise. The rollover happens at whatever rate that provider is offering that day for existing customers, which is frequently not the rate that is being advertised to new ones.

You are typically given a grace period of around seven days after maturity to change the term, withdraw the funds or move the money without penalty. After it ends, a 12-month deposit can restart at a rate well below the market, with the next exit costing a break penalty.

Three details set on the day a term deposit opens decide what happens at maturity:

1. The maturity date, which is when the grace period starts.
2. Whether automatic rollover is switched on and what happens by default. Some providers take the maturity instruction upfront, which removes the problem entirely.
3. The grace period length, set out in the product terms, which is how long there is to act once it matures.

The comparison that matters at maturity is not between the rolled rate and the old one, it is between the rolled rate and what is currently on offer across the market, including from the same bank on a new deposit. Providers price new money more sharply than existing money, and the gap is often larger than any break penalty you were worried about earlier.