What’s the difference between a term deposit and a savings account?

Knowing how both options work could help you understand how each could help you at different stages of the savings journey. Here is a brief comparison of the main differences of term deposits and savings accounts.

What is a term deposit?

With a term deposit, you lock away an amount of money for an agreed length of time (the ‘term’) – that means you can’t access the money until the term is up. In return, you’ll get a guaranteed rate of interest for the term you select, so you’ll know exactly what the return on your money will be.
 

What are the potential benefits of a term deposit?

A potential benefit with a term deposit is that your savings are locked away in a low risk savings account.

Another potential advantage is the certainty of a fixed interest rate. That means not only will you know exactly what the return on your money will be, but also, should interest rates drop, you’ll still be locked in at the same rate of interest.

What about any downsides?

If you need to access your money sooner, you will usually have to pay a penalty fee and in many cases you 'll need to give up to 31 days' notice. Therefore it’s important you’re sure you won’t need to access your money while you have it locked away in a term deposit. As your term deposit comes to an end, it’s also important to consider your options as some term deposits may automatically renew to the current rate at that time, which may be higher or lower.

Locking into a fixed interest rate can potentially have a downside - should interest rates increase, you won’t be able to take advantage of a better rate while your money is locked in the term deposit.

Most term deposits will have a minimum balance deposit required, often between $1,000-$5,000. If you’re just starting to save, it could be hard at first to lock away that amount of money for a period of time.

What is a savings account?

A savings account is a bank account designed for saving. Generally interest is paid on the money in the account while still giving access to the savings when needed. Some savings accounts may also pay bonus interest when certain conditions are met, such as growing the account balance by the end of the month. Savings accounts usually have a variable interest rate, so the amount of interest payable is likely to fluctuate over time.
 

What are the potential benefits (or downsides) of a savings account?

Perhaps the biggest benefit of selecting a savings account over a term deposit is being able to access your savings should you need to, while still earning interest.

You can also add to your savings account whenever you like – either on a regular basis or when you have extra money to put in it. With a term deposit on the other hand, once you’ve made the initial deposit you won’t be able to add any more to the balance until the agreed term has ended. Also, unlike a term deposit, a savings account doesn’t require a minimum balance.

Savings accounts generally have a variable interest rate and depending on market conditions, the rate could go either higher or lower.  This will impact the amount of interest you could earn on the money in your account.