Term deposit or savings account?

Both products do the same simple thing: a bank holds your money and pays you interest on it. The difference is what each side promises. In a savings account, you can take the money whenever you like and the bank can change the rate whenever it likes. In a term deposit, you commit the money for a fixed period and the bank commits to a fixed rate for that period.

That single trade is the whole comparison. You are exchanging access for certainty. Everything else, the conditions, the penalties, the rate differences, follows from it.

It explains why the comparison cannot be settled by looking at today’s rates. A savings account paying more than a term deposit today may pay considerably less in six months, because nothing stops the bank from cutting it. A term deposit paying slightly less today will still be paying that rate at the end of its term regardless of what the Reserve Bank does. Whether that is worth it depends on where rates are heading and, much more importantly, on when you need the money.

The instinct with a term deposit is to lock away money for as long as possible to get the highest rate. That instinct is often wrong, and the reason is visible on any rate table read across terms rather than down a column.

Banks price each term on what they expect rates to do. When they pay more for six months than for three years, they are signalling plainly that they do not want to be locked into today’s rate for long, which is what a market expecting rate cuts looks like. When longer terms pay more, the expectation is that rates hold or rise. This pattern across terms is the yield curve, and its shape is more informative than any single rate on the board.

The practical consequence is that when cuts are expected the highest rate available is frequently at six or twelve months, not at three or five years, and the longest term means a lower rate for far longer. When rises are expected the longer terms tend to pay more. The shape of the curve says which applies.

This is the question that decides the product for many savers, and it is the one most people skip. A term deposit is not a locked box you cannot open, but it is deliberately designed to make opening it unattractive.

In most cases, breaking a term deposit early means all of the following:

• Giving 31 days’ notice before the bank will release the funds. This alone rules term deposits out for genuine emergencies, because the money is not available when you need it.
• An interest reduction applied to the whole term, not just the remaining portion. Commonly the rate earned is cut by between 20% and 90%, depending on how early you break.
• Possible administration fees on top, depending on the institution.
• No partial withdrawals at some banks. You break the whole deposit or none of it, which can mean losing the rate on the entire balance to access a fraction of it.

The other end of the term deserves as much attention. When a term deposit matures with no instructions, many banks automatically roll the balance into a new term of the same length, and some move it into a lower-paying holding account instead. A rolled-over rate is set at the time of rollover and is frequently well below what is on offer elsewhere, because the bank is pricing a customer who has not been paying attention.

What happens at maturity can be worth more than a few basis points at the outset. The grace period is the window to take the money, roll it deliberately or move it.

When the money will be needed usually says more than which product pays more.

• An emergency fund needs immediate access, which a savings account provides, particularly an unconditional one, and a term deposit specifically does not.
• A house deposit needed in three months lines up with a savings account or a very short term deposit. A one-year term earns slightly more and risks a break at settlement.
• A lump sum that will not be touched for a year or more, such as an inheritance or the proceeds of a sale, lines up with a term deposit, which also puts it out of easy reach.
• Money being added to each month lines up with a savings account, since term deposits generally do not accept additional contributions during the term.
• A large balance above a bonus account’s cap can earn more split, with the capped portion in the savings account earning the bonus and the excess in a term deposit rather than dropping to a base rate.
• Money needed at an unknown date lines up with a savings account. Uncertainty is exactly what a term deposit handles worst.

Both products sit under the same protection. The Australian Government’s Financial Claims Scheme guarantees deposits up to $250,000 per account holder per authorised deposit-taking institution, covering savings accounts and term deposits alike. The catch is the same for both: many bank brands share a single banking licence, so spreading a large balance across two brands of the same group does not double your cover. Above $250,000, the cap follows the licence rather than the branding.

One last point that decides more cases than the rate does. A term deposit requires nothing of you once it is open, while a bonus savings account requires you to meet conditions every month for as long as you hold it. For a saver who will not track those conditions, the term deposit’s slightly lower headline rate may well be the higher rate actually earned.