Long term deposits vs. short term deposits: What’s the difference?

After analysing 9 term deposits from 9 providers, Canstar discovered those in it for the long haul could be in for bigger returns. But before you lock yourself in, consider whether a term deposit is right for you

So you want to find the best way to maximise your money, who can blame you? A term deposit is a popular option to keep savings out of reach and to boost those dollars in the process. And, according to Canstar’s latest research, locking away the savings for longer than a year can often mean greater returns.

Compare term deposit rates

In the case of five-year term deposits, in 2017 you can get a maximum rate of 4.20% (up from 4.05% in 2016), according to Canstar’s database. This compares with a maximum rate of 2.85% for a three-month term deposit (down from 2.95% in 2016). When you compare maximum rates for the two different tenures, there’s a 1.35% difference, or 135 basis points. But before you are blinded by the dollar signs appearing in your eyes, it’s important to look at what having a term deposit entails. and whether you’re in a position to lock away your money at all.

Comparing three-month term deposits with five-year term deposits:

Three-month term deposits

2016 2017 Difference +/-
Minimum 2.50% 2.40% -0.1%
Maximum 2.95% 2.85% -0.1%
Average 2.79% 2.63% -0.16%

Five-year term deposits:

  2016 2017 Difference +/-
Minimum 3.50% 3.30% -0.2%
Maximum 4.05% 4.20% +0.15%
Average 3.85% 3.97% +0.12%

Term Deposit Rates New Zealand: How does the length affect your finances?

term deposit rates new zealand

Once you have invested money in a term deposit, it’s in there for the entire length of the term selected – anything from three months to five years. Minimum, maximum and average rates have decreased for all nine of the three-month and six-month term deposits rated, according to Canstar’s research. In the case of one-year term deposits, the maximum rate has increased by 0.15%, but the minimum and average rates have decreased. The news is more positive in the longer term deposits. For two and three-year term deposits, minimum, maximum and average rates have increased over the past year. And, across all five-year term deposits rated, only the minimum rate has decreased (by 0.2%) but the maximum and average rates have increased.

The chance to get a high interest rate on your term deposit is no doubt appealing, but it’s important to think beyond any possible returns and to consider your personal financial situation. Ask yourself when you will need access to your money. For example, are there any big events coming up? Sure, you might think you have budgeted enough money for that upcoming holiday or your best friend’s wedding, but have you also got a bit of leeway in that budget? Five years is a long time to lock away your money, so do not take the term deposit length lightly. CANSTAR has looked at how term deposit rates have fared over the past year; you can read more on that here.

Are there any other reasons why rates increase with longer term deposits?

Banks don’t just pluck a term deposit rate out of thin air; there is a basis for decisions around increasing or decreasing rates. Providers set their term deposit rates around what they anticipate will happen in the wider economy and will sometimes pay a small premium for longer-termed deposits, so they can ensure they have those funds on hand. After all, they need funds available for lending to customers in the future.

Choosing a term deposit length, what else do you have to consider?

choosing a term deposit length

Even when you do make a financial plan, sometimes life gets in the way, things crop up and you suddenly need access to your funds. While it is possible to break your term deposit, you’ll generally pay a penalty for doing so.  Researching early exit penalties is an essential part of your term deposit homework. According to the Banking Ombudsman scheme, if providers agree to let you break the term deposit, you’ll likely lose the interest that attracted you to the savings product in the first place. The provider might also try to get back any interest that it paid out during the length of the deposit. The reduction in interest may depend on how much money you put into the account, the current interest rates and the length of the term. And before committing to a term deposit, make sure you do a thorough comparison of what is available on the market, comparing interest rates, but also the features they offer. Check out Canstar’s latest ratings results, to find out what’s on offer in the term deposits market.

Compare term deposit rates

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