How do term deposits compare to on-call savings accounts?

Whether you’re struggling to save and are wanting to change your spending habits, or you’re great at saving and want to get a higher interest-rate, investing in the right place is the key step to reaching your money goals.

There are a multitude of benefits to both term deposits and on-call accounts – the question is, which choice can you benefit from the most? We look at the pros and cons of both term deposits and on-call accounts to help you decide.

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A term deposit can be defined as a sum of money deposited into a financial institution for a period of time, otherwise called a term. You cannot access the money until the end of the term, unless you apply for an earlier withdrawal. Be careful, though, you may receive interest penalties where you lose out on interest if you take the money out early. Term deposit interest rates, on average, are currently higher than savings account interest rates so, assuming interest rates for savings accounts don’t go up during the term, a term deposit is likely to provide you a greater return on your investment.

Whereas, an on-call savings account, also known as a direct call savings account, at-call account or a call deposit account, is an account that has the interest-bearing benefit of a savings account but similar to a checking account, you have unlimited access to the funds. This type of account is therefore beneficial to those who are wanting to save, yet find themselves encountering situations where they need extra money unexpectedly. You may be thinking on-call accounts sound too good to be true, however, some on-call accounts – called bonus saver accounts – have a relatively low base interest rate but a higher bonus interest rate. And that’s why we’re here to weigh up the pros and cons of both term deposits and on-call accounts.

How do term deposits compare to on-call saving accounts?

 

Pros to a term deposit:

  • You will receive a guaranteed return at a set amount unlike on-call savings accounts and additional savings accounts where interest rates may change.
  • Eliminates temptation to spend money because your money is locked away. So, if you’re a big spender this could be beneficial.
  • Or, if you aren’t a big spender but are saving for a big investment such as a house deposit, term deposits will help you as in this instance, even the small spends add up.
  • Typically, the interest rates of term deposits are higher than savings account interest rates and on-call interest rates so you would, therefore, receive a higher return at the end of the term.
  • Your interest rate is locked in for the term, which protects your returns in times when interest rates are declining.

Cons to a term deposit:

  • Investing in a term deposit means that you will not typically have access to that money over the period of the investment.
  • If you exit the term deposit early, then you can expect to have the interest earned offset by an interest penalty, whereby a certain amount of interest will be deducted from the original interest rate. This amount will vary depending on the provider, the amount in the deposit, current interest rates and the length of the term.
  • And, if it’s within the cooling-off period (usually 31 days) you won’t receive any interest at all. In these instances, you would lose money on interest and may have been better off putting your money into an on-call savings account.
  • You’ve got to consider inflation when assessing you real rate of return. When your money is locked away in a term deposit for an extended period, if inflation increases, then the real rate of return on term deposits decreases. This is because the inflation rate is subtracted from the nominal rate of return. As at February 2019, inflation is at 1.9%. So, if you were receiving the current highest 4-year term deposit interest rate considered in Canstar’s database, of 3.9%, the real rate of return would be 2%. If inflation was to increase to 3%, then your real rate of return would decrease to 0.9% for the remainder of the term or until inflation slowed.

Pros to an on-call account

Pros to an on-call account:

  • Unlike investing in a term deposit, you have unlimited access to money in an on-call account over the period of the investment and this doesn’t have an effect on the interest rate of specific on-call accounts.
  • You can withdraw money from the direct call account without any notice.
  • And, you can transfer money into the on-call account whenever you wish, so automatic transfers are viable.
  • Generally, there are no fees, no minimum deposit and no bonus criteria (unless it’s a bonus saver account).
  • The interest rates can still be high. For example, the highest on-call account in Canstar’s database, as at 11/02/19, is 2.5%.
  • You can transfer money from an on-call account to another type of account or even to another financial institute if higher interest-rates appear on the market.

Cons of an on-call account:

  • Unlimited access to funds may mean you’re more inclined to spend money you were intending on saving.
  • The interest rates of on-call accounts tend to be lower than term deposit interest rates.
  • If you choose a bonus saver account, you will lose out on the bonus interest rates if you don’t meet the conditions. In this case, the interest rate will be significantly lower.
  • On-call account interest rates are often affected by the official cash rate (OCR), often following OCR movements closely. When the OCR is lowered, interest rates for these accounts tend to decrease. A lower interest rate is ideal for loans but this is definitely not the case when it comes to savings accounts. Since November 2016, the OCR has remained at the lowest it’s ever been – 1.75%.
  • Inflation also affects on-call accounts; If you’re not careful, the inflation rate could take a huge bite out of the value of your interest rate. This is, again, due to the fact the true value of any returns should account to the change in buying power over time (i.e. inflation). If the inflation rate is higher than your on-call account interest rate then, in a year’s time, you’ve actually lost value in the amount in your account.  

Term Deposits

Should you invest your money in an on-call account or a term deposit?

With all these advantages and disadvantages, certain aspects may have jumped out at you. But, if you’re finding it difficult to decide where to invest your money, working out whether you’re a Regular Saver or a Flexible Saver could really help.

A Regular Saver is someone who is prepared to meet stricter requirements, in order to gain potentially higher interest rates. As the name suggests, this type of saver regularly puts money aside to save and meet such requirements. Therefore, the Regular Saver may make regular deposits into a savings account to gain bonus interest rates, or save and put money into a term deposit and accept the fact they can’t access the money for the entirety of the term. This type of saver may also suit bonus saver on-call accounts whereby bonuses are received for meeting specific conditions. However, check out the interest rates, as term deposits tend to have higher rates and therefore the Regular Saver may benefit more from investing their money in a term deposit, particularly if they already have a significant sum at the outset.

On the other hand, a Flexible Saver would be more suitable to an on-call account. Flexible Savers are still after an account with a reasonably high interest-rate but with the benefits of a checking account. They may be wanting unlimited withdrawals and deposits, with no extra fees, or an account that doesn’t require minimum payments.

At the end of the day though, we’re all wanting to boost our savings and to do so, a higher interest rate is preferable. In the table below, we have put the minimum, maximum and average rates for a Flexible Saver and Regular Saver, along with a variation of different term deposit lengths. The Regular Saver interest rates shown are both the base rate and the bonus rate of the bonus saver accounts added together. We have split the interest rates into a $5000 balance and a $50, 000 balance so you can visualise how much interest you could earn from different ways of investing your savings.

Annual Percentage Return on a $5,000 Balance*

Profile Minimum Maximum Average
Flexible Saver ** 0.10% 2.50% 0.64%
Regular Saver*** 0.75% 2.50% 1.66%
3 Months 1.75% 2.90% 2.61%
6 Months 1.90% 3.30% 3.08%
1 Year 1.90% 3.55% 3.24%
2 Year 1.90% 3.60% 3.29%
3 Year 1.90% 3.70% 3.38%
5 Year 1.90% 4.00% 3.53%
*This quoted interest rate per annum is used for all profiles. The calculation assumes that no additional deposits are made into the savings accounts.

**The base rate only is used for the Flexible Saver profile (no promotional interest)

***The base rate and the conditional rate are used for the Regular Saver profile. The calculation assumes that bonus conditions are always met.

Annual Percentage Return on a $50,000 Balance*

Profile Minimum Maximum Average
Flexible Saver ** 0.10% 2.50% 1.73%
Regular Saver*** 0.75% 2.50% 1.74%
3 Months 2.50% 3.00% 2.74%
6 Months 2.90% 3.35% 3.22%
1 Year 2.90% 3.55% 3.36%
2 Year 2.90% 3.70% 3.50%
3 Year 3.00% 3.80% 3.61%
5 Year 3.30% 4.00% 3.84%
*This quoted interest rate per annum is used for all profiles. The calculation assumes that no additional deposits are made into the savings accounts.

**The base rate only is used for the Flexible Saver profile (no promotional interest)

***The base rate and the conditional rate are used for the Regular Saver profile. The calculation assumes that bonus conditions are always met.

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