What affects term deposit interest rates?

If you're comparing term deposit rates at any given time you'll usually find a big gap between the highest and lowest available. Do the same thing a year later and the market will likely look completely different. Term deposit rates vary from product to product and fluctuate dramatically over time, but why?

Unlike variable home loan or savings account rates, returns on term deposits aren't directly synched up to the RBA cash rate. There's a correlation, but in general there are several factors that inform term deposit rates.

Why are some term deposit rates bigger than others?

As of Cheap April 2025, there are a handful of term deposit rates in Australia at or near 5.00% p.a.. At the other end of the scale there are plenty of products that return 1% p.a. or even less. There are a few things that explain this discrepancy.

Bank strategy

Term deposit rates often depend on how big a source of funding TDs are for a particular bank. Deposit products like TDs and Savings Accounts usually make up a significant portion of the money the bank uses for its loans, but the exact proportion varies between institutions. Banks that rely more on term deposits might need to offer above-average rates compared to the rest of the market to keep bringing in the necessary volume.

Bank size and prominence

Lesser known banks sometimes need to offer higher rates to catch the attention of unfamiliar customers. According to APRA, in September 2024 nearly 80% of the $1.19 trillion held in term deposits was held by the major banks. That's despite smaller outfits like Judo or Heartland Bank consistently offering stronger returns than the big four. Australian savers have a clear bias for the big brands they know, which means smaller players have to make their rates comparatively higher to compete.

Term length

TD terms can range from one month to as long as five years and rates tend to vary dramatically depending on the term length. Banks often offer the highest rate on popular terms like six months or one year, but not always. You'll sometimes find eye catching rates on less round terms - five months, eight months - which can be a specific bank trying to offer a high rate in a less saturated market.

Are rates higher on shorter or longer term deposits?

Depending on the outlook for the RBA cash rate, longer or shorter term deposits can have the highest rates. For example, in 2024 six month rates often exceeded one year rates, given uncertainty about when/if the RBA would start to bring down rates.

Deposit size

Banks often also differentiate returns based on deposit size. Generally speaking a larger deposit means slightly higher rates, although in some cases banks curtail rates on extremely large deposit sizes.

Interest payment frequency

Finally, many banks offer more frequent interest payments on TDs for a slightly discounted rate. Returns can be paid upon maturity as a single lump sum, or might be paid annually, semi-annually, quarterly or even monthly. In general, more regular payments means a slightly lower rate.

What impacts term deposit rates?

RBA cash rate

While not quite as closely connected as savings account rates, the RBA cash rate still tends to be a big influencer of term deposit rates. When the cash rate goes up, banks need to adjust deposit rates accordingly to keep attracting customers.

According to the RBA, in early 2022 the average special term deposit rate (across all terms) was about 0.15%. By June 2023, that number had risen to about 3.60%. In that time the RBA cash rate went from 0.10% to 4.10%.

The main difference between savings account and term deposit rates is that SA rates tend to move in sync with the current cash rate while TD rates price-in future cash rate expectations. The below graph shows when the cash rate was increased from 4.10% to 4.35% in November 2023 , there was a nearly uniform corresponding increase to savings account rates. Barring a slight decline at the start of 2024, both then stayed consistent.

TD rates on the other hand, after peaking in mid to late 2023, started to decline, seeing a dramatic drop in mid 2024. At that time most economists and the majority of the market were expecting forthcoming cash rate cuts. Bank therefore wanted to avoid locking in too many customers on high long-term TD rates only to see interest rates drop off dramatically in the meantime. Worst case scenario, the bank finds itself paying term deposit rates to customers at a higher rate than it is receiving from variable rate home and personal loan customers.

Since savings account rates are variable, banks can just cut them as and when rates come down, whereas TD rates are fixed, and subsequently need to be addressed more proactively. It's analogous to the difference between fixed and variable rates on home loans.

Other market conditions

There are other economic factors that can influence TD rates beyond the RBA:

• Inflation: If the annual inflation rate is higher than the rate on deposit products, in real terms savings are going backwards, so punters are probably more likely to eschew TDs. When inflation is high, banks may need to hike TD rates in order to keep attracting customers (although normally the inflation rate informs the cash rate)

• Wholesale funding rates: Banks are also normally comparing term deposit rates to alternative sources of funding. If wholesale market rates change, banks might be able to borrow at a lower rate and so don't need to offer as high term deposit returns.

• Government bond yields: Since government bond yields are often considered the benchmark interest rate in wholesale markets, a change in yields can influence term deposit rates. As this is a major funding source for banks, lower yields imply a rising bond price, which can be a signifier of investors chasing security. If yields lower then banks often match the yield curve (i.e. the interest paid across different timelines) on their term deposits.

Internal strategy

Huw Bough, Chief Retail Banking Officer at Bank of Sydney, told the Savings Tip Jar podcast there are a couple of non market factors that can influence term deposit rates.

• Customer behaviour and demand: "At different periods, whether it be Christmas, [other] holidays, all those sorts of factors will impact the amount of savings that are in the pool we can compete for. [During] the better periods of time, around the February/March, post Christmas period, we're able to attract more deposits."

• Organisational strategy and regulatory requirements: "[This] is making sure we've got the minimum liquidity holdings, meet our funding needs". Banks are required to hold a minimum amount of capital to cover shockwaves and to account for risk in the home lending space, so term deposits can be a simple way to secure customer deposits.

Term deposit rates in 2025

June 2023 was the recent peak for term deposit rates. For a brief period Bank of Sydney were offering 5.50% p.a. on six month term deposits while other providers like Judo Bank were at 5.40% or above. Since then, rates have broadly been trending downwards, with emphasis shifting to shorter terms. At the time of writing in March 2025, many banks are offering the highest return on three month terms given the possibility of further RBA cuts later in the year. Rates have mostly dropped below 5.00% p.a.. Given the inflation rate is also significantly lower now then it was in 2023 though, term deposits might still appear an attractive, low risk investment, particularly in the short to medium term.

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