Compare Term Deposits

What is a Term Deposit and How Does It Work?

A term deposit is an investment held at a financial institution for a fixed amount of time, or a “term.” The investment is held for a predetermined period, typically between one month and five years, with a fixed interest rate for the agreed period. In most cases, the money can only be withdrawn when the term ends; if it is necessary to access it earlier, penalties will apply. These may be partial or full forfeiture of the interest the term deposit would have earned.

Term Deposit vs Savings Account

Term deposits are funds that are locked away and can earn higher interest rates than a traditional savings account. Money in a savings account can usually be withdrawn at any time, but would then earn typically less interest.

Is a Term Deposit Worth It?

A term deposit can be worthwhile in the long run, but it truly depends on each individual’s unique situation and ultimate goals. For example, if an investor has money that he or she won’t need to access for a while, meaning it could be deposited with a longer term, then the rate could be worth it.

Conversely, if an investor needs the funds sooner for improvements on a home, or to grow a small business, then a short-term deposit might not be worth it. There are different types of term deposits available that can make the investment rates beneficial.

Short Term Deposits

A short term deposit can last anywhere from one month to a year.

Short-Term Deposit Pros

• This is not as big a commitment as a long-term deposit. People who think they might need to access their funds in the near future might be most comfortable locking them away for a short term.
• It can be a way of meeting short-term savings goals; for example, an upcoming holiday or new car.
• It comes with a lower chance of being stung by early withdrawal fees. If the money is needed unexpectedly, it’s easier to wait out a short term and avoid early withdrawal penalties than it would be with a longer term.
• If market interest rates rise, there are more frequent opportunities to reinvest or add more money to the term deposit balance and reinvest for another term.

Short Term Deposit Cons

• Shorter terms usually offer a lower interest rate.
• As a short term ends, it can be tempting to withdraw the money and spend it.
• It’s not as low maintenance. The shorter the term, the sooner the decision of reinvesting will roll around.
• Those who choose to let the deposit roll over could lose a competitive interest rate if the market rates have changed.

Long-Term Deposits

A longer deposit (which typically lasts between one and 5 years) can work for savers who have long-term goals. It can also be useful for people who have a lump sum, such as a work bonus or inheritance, that won’t be needed in the near future.

Long-Term Deposit Pros

• Longer term deposits often pay higher rates than short terms.
• The interest rate will be locked in for a long time. If market rates drop, the interest on the investments will remain the same for longer.
• It can help with saving for long-term goals, as the investment will be hard to access without harsh penalties.

Long-Term Deposit Cons

• If market rates rise, the investment will be locked into the lower rate for the term.
• The long-term commitment means the funds cannot be accessed for emergencies or unexpected expenses without incurring penalties.
• It requires careful planning to ensure that investors can afford to have the funds locked away for a long time without accessing them.

What You Should Know Before Choosing a Term Investment Option

Investing can be an exciting opportunity, but it is important to plan ahead and be diligent in researching the various available options before nailing down a specific financial choice.

Are term deposits safe in NZ, or can they cause money loss?

Any investment comes with a risk. There is no guarantee that investors will make money, and it could be that they will lose money in the end.

Can investors keep putting money into a term deposit?

Some institutions offer a “top up” feature, which allows investors to add additional funding later. This is not a common feature, however, and is usually offered on specific term deposits.

Will term deposit rates increase in NZ?

There is no guarantee that rates will increase. While rates fluctuate almost daily, investors can watch the trends and make educated predictions on when rates will increase. But there is no true way to say for certain when term deposit interest rates will rise.

Can you end a term deposit early?

Yes, but first, read the terms and conditions to find out what will happen then. Some institutions allow a one-time withdrawal for no fee, while others levy additional charges.

Do you pay tax on term deposits?

Yes, the NZ government assesses a tax depending on the investor’s income level.

How do I apply for a term deposit?

Here are the important things investors need when applying to open a term deposit:

Contact details

Whether applying online or inhouse, investors will need to provide a phone number and email address when opening a term deposit. Give accurate details and update them when necessary, since the bank will use this information to send updates on the term deposit maturity.

Identification

A photo ID (such as a driver’s license, student ID, or passport) will usually be required, especially of those who are new to that particular financial institution. These are required to obtain proof of age, as banks have a variety of minimum age limits for term deposits; most are lenient, and some offer special accounts for children.

Member number

Those who bank with a credit union will need to supply their member numbers. Investors who are not already members will be required to sign up. Be aware that this process might involve a membership fee.

A bank account

This is the account to which the term deposit interest will be sent. Those who are opening a term deposit at a different bank to their usual one should check to see if the new provider will pay the interest into their old bank account. Some do not allow this, and will require new members to start a savings or bank account with them when opening a term deposit.

A desired term

Carefully consider the different types of term deposits available.

The important things investors need to think about are their budgets, and also their plans for the future. Choose a term that fits into those parameters, to avoid unnecessary early withdrawals.

Minimum deposit

The deposit must be the lump sum previously decided with the financial institution, in line with the term that was chosen. Think about which term deposit is best, and have at least that amount of money available before applying.

A future savings plan

Have a plan in place for what to do when the term deposit matures; decide whether to withdraw the money or reinvest it for another term. Make these arrangements with the financial provider so both parties know what the money will be doing when its term comes to an end.