Term Deposit — Is It A Good Investment?

A term deposit, a.k.a. time deposit, is ‘setting and forgetting’ an amount at your bank while earning a higher rate of interest than a savings account. Now, what if you decide to break a term deposit? Do you have to notice your bank? What happens when the deposit matures?

Early withdrawal of your Term Deposit

After you set up or reinvest a term deposit, most banks have a cooling-off period. During this time, you have the option to cancel it, change the amount, or change the terms. However, you won’t earn any interest if you cancel.

Some banks may let you break your time deposit in the first 30 days with no penalty, but with no interest either. Apply to your bank outside the cooling-off period if you want to withdraw the funds early. 

Many Australian-owned banks have introduced tougher rules for early withdrawals of term deposits. Until recently, they didn’t require customers to give notice (31 days) to break a time deposit. The same notice period has been introduced for their New Zealand subsidiaries. 

On account of the global financial crisis, the Australian regulators want the banks to have enough funds to cover withdrawals and not default on loans. Term deposits are part of a liquidity coverage ratio, which determines how much money banks must have on hand. 

Reduced interest

There are penalties if you break a term deposit early. It can be a reduction from the original rate or the actual term of your investment. You may be charged a fee, your interest rate may drop, or end up with no interest at all.

What if you’ve already been paid interest before breaking your time deposit?

You may receive monthly interest paid into your regular bank account, while the amount you withdraw gets reduced. This is to reflect the difference between the payments already made and the current payable.

An early withdrawal of a time deposit can result in you overpaying withholding tax on any interest you’ve already received. In this case, apply for a refund.

Partial withdrawal

You should receive the original interest rate on anything you leave, even if you don’t withdraw the full amount. Make sure it doesn’t drop you to a lower tier of interest. Usually, you’ll get the rate that applied to the lower tier at the date of your original investment. 

Some banks allow withdrawal of up to 20% of your time deposit for investments over certain terms, without any reduction in interest. These withdrawals can’t drop you into a lower tier. 

Hardship rules in Term Deposit

No notice is required if you need to break your term deposit due to hardship. The following are what may qualify as hardship:

• unemployment 
• separation 
• medical bills 
• illness 
• funeral costs 
• costs due to a disaster.
  

You’re required to provide evidence as the bank makes the decision whether you’re in hardship. If you have funds in other accounts, you may be required to use it before you’re allowed to break a time deposit. 

Reaching maturity

What happens next if your term deposit nears the end of its term? 

Usually, you’ve given the bank instructions on what you wanted your time deposit to do when you set it up. The principal and interest can be paid into another bank account, or roll them over for another term. 

Your bank will most likely contact you before your term deposit is due to mature.

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