What is a term deposit?

How a term deposit works

You deposit a lump sum (most providers ask for a minimum of somewhere between $1,000 and $5,000), pick a term, and lock in the rate on offer that day. That rate doesn't change, even if the cash rate moves or your bank drops its rates the following week. In exchange for that certainty, your money is tied up: you can't add to the deposit once it's opened, and withdrawing early usually means giving notice (often 31 days) and accepting a lower rate as a penalty.

Interest is generally paid as simple interest during the term, either at maturity or at set intervals like monthly or quarterly, depending on the product. It doesn't compound within the term the way a savings account might. If you reinvest at maturity and keep doing that, you get a compounding effect over successive terms, just not within a single one.

What happens when it matures

Your bank will usually contact you shortly before the term ends with your options: withdraw the funds, roll over into a new term at the current rate, or choose a different term altogether. If you don't respond, most banks automatically roll it over, which may land you on a lower (or higher) rate than you started with. Worth diarising the maturity date rather than leaving it to chance.

Rates and tax

Term deposit rates move with the cash rate and vary a fair bit between providers, smaller banks and mutuals are often more competitive than the big four, so it's worth comparing current rates on a site like Canstar, Finder or Mozo rather than defaulting to whoever you already bank with.

Interest earned is taxable income, added to your assessable income and taxed at your marginal rate plus the Medicare levy, the same as wages or rent. There's no special concessional rate. If you're on a high marginal rate, factor that into your comparison against other options, since the after-tax return can end up meaningfully lower than the headline rate.

Term deposit vs a high-interest savings account

Both are low-risk ways to earn interest on cash sitting outside the share market. A term deposit typically pays a higher rate for locking your money away, while a high-interest savings account gives you full access at a variable, often lower, rate. If you might need the money at short notice, an emergency fund is generally better sitting in a savings account. If you've got a lump sum you genuinely won't touch for 12 months or more, a term deposit often wins on rate.

Is your money protected?

Deposits with APRA-regulated banks, credit unions and building societies are covered by the Financial Claims Scheme up to $250,000 per account holder, per institution. That makes term deposits one of the lowest-risk places to hold cash in Australia, though it's not zero risk: your real return can still be eroded by inflation, and locking in a rate means missing out if rates rise while your money's tied up.