How does term deposit time affect your returns

Term deposits may come across as a very simple product, but that doesn't mean there's a 'one size fits all' method to choosing one. Banks typically offer scores of different term deposit products with each guaranteeing different rates of return.

But one of the biggest determinants of how much you can make on your cash investment lies in the key word 'term'.

What is a term?

Simply put, the 'term' in term deposit is the length of time your money is deposited with a financial institution. Each term will come with a fixed rate of interest, but this may vary according to:

• how often interest is paid (e.g. quarterly, annually, at maturity etc.)

• the amount you're depositing

• whether you meet the agreed requirements to be paid interest

Whatever term you choose, term deposits require you to lock your money away for the entire period. If you access it earlier, you simply won't be paid that interest. You'll typically also have to wait for your deposit amount to be released and possibly be hit with a break fee, a reduction in your interest rate, or be paid no interest at all.

What terms are available?

Each ADI (authorised deposit-taking institution) will offer a range of terms, typically:

• One month

• Two months

• Three months

• Six months

• Nine months

• One year

• Two years

• Three years

• Four years

• Five years

Typically, 'short-term deposits' are for less than one year, while anything over a year is classified as a 'long-term deposit'. Five years is generally the longest term offered to retail depositors.

See also: Long-Term Deposit rates for 2, 3 & 5 years

Depositors can choose for their interest to be paid at the end of the term (or at maturity) or at more regular intervals (e.g. monthly, quarterly, semi-annually, etc.) into their bank accounts. Many retirees prefer this option to provide them with regular income on their cash investments. In most cases though, more frequent payments come with a lower interest rate than an end-of-term payment even though the term length is the same.

The vast majority of term deposits pay simple interest, that is, the depositor earns interest on the money they've deposited (the principal) and not on any interest they earn from it.

There are a small number of compound interest term deposit products on the market where depositors earn interest on their principal plus on the interest it's already earned, but these are not the norm.

To effectively earn compound interest on a standard term deposit, it's up to the depositor to reinvest their principal, plus the interest it's already earned, into a new term deposit.

Remember: Interest rates are displayed as a p.a. or 'per annum' figure, meaning it is a representation of what you will receive over an entire year - not over the term.

How are term deposit rates set?

Term deposit interest rates vary generally in line with the Reserve Bank of Australia cash rate, as illustrated via the graph below.

Longer terms typically offer higher interest rates to compensate depositors for locking their funds away for longer periods, but this is not always the case.

In a falling interest rate environment, where ADIs expect the cash rate to decline in the future, they may be less likely to offer attractive market interest rates for longer-term deposits (as you can see has happened to the average three-year term deposit rate since mid-2024).

Of course, ADIs also consider other factors in setting term deposit rates besides their forecasts of the cash rate. They will also take into account wider market activities, competition, and their own internal business decisions.

Essentially, by setting term deposit rates, an ADI is taking a gamble they will secure your deposit for a lower rate than where interest rates may be during that term. Depositors are also taking a gamble that the rate they lock in at will be a higher rate than where market interest rates will be.

The table below features some of the most competitive term deposit rates currently being offered on the market:

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Term Deposit - 4 months

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4.70%Interest rate p.a.

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Important Information and Comparison Rate Warning

How different terms affect your interest

Given the cash rate has the capacity to move eight times a year - and the global economy can be unpredictable - timing the market and finding a term 'sweet spot' can be a difficult undertaking.

Here are the average term deposit interest rates offered by Australia's five largest banks on $10,000 deposits in two recent periods, according to the RBA's Retail Deposit and Investment Rates data. The data compares April 2022 when Australia's cash rate was at a low of 0.1% with November 2023 when it rose to its most recent high of 4.35%.

	April 2022: % p.a.	November 2023: % p.a.
One month	0.05%	1.25%
Three months	0.10%	3.50%
Six months	0.20%	3.85%
One year	0.40%	4.55%
Three years	0.75%	4.00%

Source: RBA

Anyone taking out a three-year term deposit in April 2022 would have locked into an interest rate of 0.75% p.a.

By the end of that term, in April 2025, the cash rate would have risen to 4.10%, meaning they would have missed out on some significant earnings, even if they'd just kept their cash in a variable interest savings account. Towards the end of that three-year period, many high-interest savings accounts were paying over 5% p.a.

Such is the inherent gamble of term deposit investments.

See also: Are term deposits a good investment option right now?

Case study: Different term deposit terms

Let's consider the difference 'term' can make to term deposit investments. Three people - Annie, Barry, and Callie - have $10,000 to invest in a simple interest term deposit at the same bank:

• Annie wants to invest in a short-term term deposit for three months, which gives her an interest rate of 4.55% p.a.

• Barry wants to invest in a one-year term deposit, which is currently offering 4.45% p.a.

• Callie has longer-term ambitions and puts her money away for five years at 3.80% p.a. (interest paid annually)

As interest is expressed on a per annum basis, you can see the total interest earned varies significantly according to the term. (These figures are before any income taxes, which is applicable to any interest earned on savings including term deposits.)

	Interest rate (paid at maturity)	Total interest earned on $10,000
Annie (three-month TD)	4.55% p.a.	$113.75
Barry (one-year TD)	4.45% p.a.	$430
Callie (five-year TD)	3.80% p.a. (interest paid annually)	$2,049.99

Source: based on Macquarie Bank term deposit rates and returns as at 28 March 2025

Should you go for a short- or long-term deposit?

There are many variables in determining what the optimum term deposit rate is for you. Here are some questions to ask yourself:

How long are you comfortable to lock your cash away for?

This is the most obvious consideration, and the answer will depend entirely upon your own circumstances. Typically, shorter terms may offer lower interest rates (depending on market conditions) but provide far greater flexibility and access to your funds. This is handy for people who know when they're likely to need access to their cash or have shorter-term financial goals. If you think you will need access to that cash, it's not advisable to open a term deposit.

Are interest rates expected to climb?

Shorter term deposits may also be attractive for those who are expecting term deposit rates to lift. After maturity, you may choose to reinvest those funds at a higher interest rate than you've already received (although, of course, this is not guaranteed). Along with your original principal, you can also invest the interest you've already been paid at this time, effectively taking advantage of the compound interest opportunity.

Are interest rates expected to decline?

Alternatively, when market interest rates are expected to go down, you may choose to lock into a longer term at a rate you expect will hold up well as rates fall over the deposit period. Again, this may or may not happen. It can be difficult, even for the best economists, to predict where interest rates will be in a two-, three-, or five-year period so this will be a risk you will have to assess.

Of course, term deposit rates change frequently but once you have deposited your money for an agreed term, the interest you are paid on your term deposit will apply no matter what interest rates are doing on the broader market.

What is my savings goal?

If you're looking to make some cash in the shorter term to help you save for, say, a holiday or an upcoming wedding, a shorter-term deposit is likely to best meet your aims. But if you want to lock money away for a longer period to save for a home deposit, for example, a set-and-forget longer term may suit your purposes. By putting your funds into a longer-term deposit, you're also less likely to dip into them for other purposes than if you had kept them in a general savings account.

What is my appetite for risk?

You may stand to make more money from other investments but some of these, for example, shares or property come with increased risk. With term deposits, you know exactly what you'll be getting before you deposit your cash, provided you don't need access to it in the interim. Term deposits up to a total of $250,000 per ADI are guaranteed under the federal government's Financial Claims Scheme in the unlikely event your financial institution collapses. For this reason, depositors are often advised to deposit up to $250,000 with a series of different institutions rather than a larger sum with one institution should the worst happen.

Savings.com.au's two cents

Predicting what interest rates are going to do in the short term - let alone the long term - can be challenging. Term deposits can work well for those looking for dependable, predictable returns. But don't forget, some bonus savings accounts and other high-interest savings accounts can pay similar - or more - interest as term deposit products while generally providing more ready access to your cash.

It also pays to ask yourself what you want to achieve out of investing in a term deposit. If you have done your research on what experts and markets think interest rates will do in the short, medium, and long-term and you're comfortable locking away your funds for a period that aligns with your personal financial goals, term deposits can be a low-risk investment option that provide a barrier to you easily accessing your funds. But they can also tie your money up so that you're less able to take advantage of other opportunities on the market. A financial advisor may be able to present you with the options that could best suit your circumstances.

There are scores of term deposit products on the market. Ensure you spend time finding the best rates available for your preferred time frame. But also make sure you compare conditions. Some term deposits automatically roll over when the term expires unless you stipulate you want to take your funds at maturity. Other will also have harsher early withdrawal penalties than others. As with most financial matters, doing your homework and finding a product to match your specific needs is essential to making the most of your investment.

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