Compare Term Deposits Interest Rates

A term deposit is an investment of cash placed with a financial institution for a fixed period of time, known as the term, with a fixed interest rate for your return at the end of the term.

Fixed terms can typically range from one month to five years – but some can be up to ten years – and the money can usually only be withdrawn at the end of the term. If you need to withdraw your funds before the end of the set term, you may receive an interest rate penalty.

Term deposits are popular for use by investors who prefer receiving a set return, instead of worrying about the possible daily fluctuations of the interest rates on offer for at-call accounts.  Some investors may use term deposits as just one part of their particular mix of investments.

Applying for a term deposit is essentially the same as applying for a normal savings bank account, and most applications can be made online.

Pros:

• You receive a specified interest rate at the end of the term, regardless of whether rates drop in the meantime.
• Savings are locked away, preventing the temptation to spend it all.
• Low-risk investment – less volatility in the term deposit market.

Cons:

• If you choose a short term deposit of 3 months to 12 months, you might find that the rates now on offer are lower when it’s time to renew. If you choose a longer term deposit of 3 – 5 years, rates might go up during your term – but you would miss out because your rate is fixed for the term.
• Your money is not available for use at any time. You can pay a penalty if you need to withdraw your money early.
• There is a minimum deposit amount required.
• You sometimes need to go into a branch, rather than being able to manage your account entirely online.
• Interest does not usually compound. It’s generally a simple interest, a fixed percentage paid at the end of the term.
• In order to open a term deposit, some financial institutions require you to also open a deposit account. Check the fees first! Any ongoing account-keeping fees for the account could eat up any return you earned in interest from your term deposit.

How long should you invest your term deposit?

One of the main issues in choosing a term deposit is whether to invest for the short term in the hopes that interest rates will rise, or for the long term to lock in today’s rate in case it falls further. Unfortunately, none of us can see the future, and we don’t recommend using a crystal ball to decide which way to go.

One way to hedge your bets is to “ladder” (stagger) your investments. Laddering is a strategy where you place some of your money in a long-term deposit, and the rest goes into several short-term deposits that mature every month or quarter and automatically renew at the current rate. That way, you don’t “miss out” on higher rates that come up now and then, and eventually all of your money is invested in a long-term deposit.

It’s a bit like singing a harmonic canon in rounds: someone is always starting the melody while another is finishing.

Advantages of laddering term deposits:

• Average interest rates on offer tend (at this point in time) to be slightly higher over long periods of time – but not by a great deal as we are in a very low interest rate environment. You can compare current term deposit rates here.
• It’s a structured way to invest, and it’s better than relying on a few large, but short, term deposits. You have the long-term guarantee of a certain return, which is reassuring if your retirement depends on a certain amount of income.
• It gives you more flexibility than just putting all your savings into one big, long term deposit.
• You have the option to take the short-term deposits out if you need or want to, instead of putting all of the money away for a long period of time.

Disadvantages of laddering term deposits:

• Some of your money is locked in for a longer time, so if you need to withdraw money unexpectedly, you can’t reach all of it.
• You could be stuck with a low rate for a long time on the bulk of your money. 3.95% may look like a decent interest rate today, but who knows if it will be in 5 years’ time?
• Laddering involves far more paperwork than putting all your money into one or two term deposits or a notice saver account.

Please note that these are a general explanation of the meaning of terms used in relation to term deposits. Your bank or financial institution may use different terms, and you should read the product disclosure statement of your policy carefully to understand everything that may apply during your investment term. You cannot rely on these terms in relation to any term deposit policy you may purchase.

Advance notice term deposit: A term deposit where the institution allows you to withdraw the money earlier than the end of the term, if you pay a penalty fee and give advance notice of 31 days. Advance notice term deposits often have a slightly higher interest rate than standard term deposits.

Basis points: A unit of measurement used in financial situations to describe the percentage change in interest rates or the value of a financial product. One basis point is one tenth of a percent or 0.01%.

Cooling-off period: Defines the number of days available for the investor to change the investment term or amount of money invested in the term deposit. This is done after the maturity date (when the term deposit has reached its agreed length) and usually is up to seven days.

Coupon payment: A portion of a bond, entitling the holder to receive a payment of interest. For example, a 10% coupon paid semi-annually would yield two 5% interest payments.

Debenture: A medium to long-term investment issued by a company when you lend money to that company. In return for your investment, you receive a regular and fixed amount of interest for the term of the investment. The invested funds (principal) are repaid at the end of the term (maturity).

Interest paid: The amount of simple interest paid on the principal amount (the initial amount of money placed in the term deposit). For example, a term deposit paying 6% interest per annum would pay 6% of the sum invested at the end of a 12-month term, or 3% at the end of a 6-month term.

Laddering: A method of investing in term deposits. The investor puts some of their money in a long-term deposit and the rest in several short-term deposits that renew regularly.

Maximum term: The maximum amount of time that you can receive a certain interest rate on a term deposit.

Maturity: The time at which the term deposit will expire and stop accumulating interest. Also known as the ‘end of term’.

Minimum term: The minimum amount of time that you can receive a certain interest rate on a term deposit.

TD: Term deposit.

Term: The length of time or duration a term deposit will run for.

Term deposits: An account with a financial institution where money is deposited for a set period of time. The interest rate is usually fixed for the term of the deposit and is generally higher than a transaction account, but not always higher than some other at-call high interest savings accounts. Also known as a fixed deposit.

Yield: The rate of return earned on an investment.

Canstar’s term deposit comparison table displays rates from the following financial institutions:

1. ANZ
2. ASB
3. BNZ
4. General Finance
5. Heartland Bank
6. Kiwibank
7. Rabobank
8. SBS Bank
9. The Co-operative bank
10. TSB Bank
11. Unity
12. Westpac

For more information on how CANSTAR rates term deposits, read our latest star-ratings report.