Are term deposits safe as houses?

If you’re saving for a home loan deposit and plan to enter the market within the next three years, a term deposit could be a smart place to park your spare cash.

In these days of very low interest rates, term deposits aren’t paying that much. However, they do offer (almost) guaranteed returns. Conversely, if you invest your savings in the stock market, you could earn much higher returns – but might lose the lot as well.

The other potential advantage of placing your savings in a term deposit is that you can’t touch the money, which means you won’t be tempted to use it for holidays, clothing or something other than your property deposit.

Smaller institutions may have higher rates than the big banks

Jason and Nikki* were saving for a home and thought they were two or three years away from being able to buy. They’d already saved $50,000, which was sitting in a regular bank account. After discussing their finances and plans, they decided to split that money in two:

• Place $10,000 in an on-call savings account, to cover emergencies
• Invest $40,000 in a two-year term deposit

Jason suggested they take out a term deposit with the same where they were already doing their banking - one of Australia's big four banks. However, Nikki thought a customer-owned institution might offer higher term deposit interest rates. After going online to compare term deposits, Jason and Nikki decided to invest the $40,000 in a two-year term deposit with Hunter United.

Data accurate as of 6 November 2019

The pros and cons of term deposits

Term deposits, like all financial products, come with both positives and negatives: 

• Your money is locked away – good if you like being forced to save, but bad if you want your money to be on call
• Your interest rate is set – good if market interest rates are falling, but bad if they’re rising
• Your first $250,000 is protected by the government guarantee – good if you invest less than $250,000, but bad if you invest more

What’s the government guarantee?

The federal government guarantee, officially known as the Financial Claims Scheme, protects the first $250,000 of any deposit you make with an authorised deposit-taking institution. That means:

• If you take out a term deposit with a bank, credit union or building society…
• And it that deposit is less than $250,000…
• And if that institution collapses…
• And if that institution doesn’t return your money…
• And if the government activates the Financial Claims Scheme…
• APRA (Australia’s banking regulator) will generally reimburse you within seven days

Given the government guarantee, and given that Australia’s banks, credit unions and building societies are unlikely to collapse in the first place, a term deposit may be one of the safest investments you could make.

* Jason and Nikki are not real people. This is a hypothetical case study.

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