Long-Term Deposit Rates for 2, 3 & 5 Years

What is a long term deposit?

While term deposits in the short term are generally classified as those ranging from 6-months to 1-year, long term deposits will last greater than a year. Typically with most banks, long term deposits will range in their offerings, however terms ranging from 18 months all the way to five years are amongst the most common. Typically with longer term deposits, interest is paid either monthly, quarterly, semi-annually or annually.

Holding a term deposit for a longer period of time is not without its risks, as you have to wait longer before you can access your money. But as we’ve showcased above, you can often access some higher interest rates.

Is a long term deposit the best option for my savings?

Long term deposits present a number of enticing positives as a safe place to store your savings in the long term. These include:

• Offering higher interest rates.

• Opportunity to store your money away securely for longer.

• Help you avoid interest rate uncertainty, particularly future interest rate decreases.

On the other hand, if rates increase you can miss out on some substantial gains, as term deposit rates are always fixed. Plus, should you ever need the money, you’ll have much longer to wait unless you’re prepared to fork out the costs of early termination fees.

As an example, if you took out a two-year term deposit at a rate of 4.50% p.a. and interest rates decreased by 25 basis points in the second year to 3.75%, you'd still be locked in with the initial rate.

Before considering a long term deposit as a secure place for your savings, it is important to first consider your financial goals, product flexibility and the likelihood you will require these funds in the short-term.

Pros and cons of long term deposits

Pros

• Interest payment flexibility: While it may ultimately depend on the offerings available by the bank, long term term deposits will typically grant you control over when the interest payments are applied. This means you can choose whether interest payments are made monthly, quarterly, annually or even in one lump sum at the end of your term.

• Fee-free: Banks will not charge monthly account keeping fees for choosing them to lock away your savings over the long term.

• Greater interest rates: Generally, longer terms offer higher interest rates.

• Saving incentives: If your savings were in a regular savings account linked to a debit card, the temptation is always there to potentially dip into them to meet necessary expenses. With long term deposits, penalties are often in place for withdrawing your money early providing a good incentive to keep your money invested in the term deposit.

• Interest is fixed: Even if the interest rate is reduced by the bank as a result in changes to funding or the cash rate, you'll continue to earn the fixed rate that was applied when you first opened the term deposit.

• Hassle-free investment: With a long term deposit, you don't need to continue to meet any monthly deposit requirements like you do with a bonus savings account to achieve a specific interest rate.

Cons

• Unable to receive bonus interest: As mentioned above, while term deposits do not require special conditions to be met in order to receive a higher interest rate, there is no opportunity to earn bonus interest.

• Accessing funds requires a fee: If you require access to funds in a long term deposit, early termination fees will likely apply. This could result in foregoing interest for the duration of the deposit.

• Rate rises are not passed on: Given the interest rate is fixed, if the Reserve Bank increases the cash rate and banks follow suit, you will be remain on the initial deposit rate until the term reaches maturity.

Comparing long term deposits

Interest rate

The key determinant to long term deposits is the interest rate offered by banks relative to the length of the deposit. Ensure you compare the offerings before signing up as this will make a significant difference to your savings balance over the next few years.

Interest repayment frequency

Long term deposits will offer different frequencies for your deposit to receive interest, such as monthly, yearly or at the end of the term. Keep in mind though that the highest interest rates are often reserved for those receiving interest at the end of the term.

Minimum balance

To receive a particular interest rate across the long term, some banks will require customers to have a significant amount of savings available to deposit. At minimum, a number of mutual banks will require an initial deposit of $500 to kick start your deposit journey, however it’s important to note this amount will differ considerably.