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3 risks to think about with Australian term deposits

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How do you find the best term deposit interest rates? What are the risks of this style of investment? We answer all of your burning questions here.

When the cash rate was cut earlier this year, the ABC reported that many lenders went against expectations and lifted term deposit rates. This was facilitated by banks not passing on Reserve Bank cuts to interest rates through to their home loans. It made term deposits more competitive and attractive for Australians.

While they are generally a sound investment strategy, there are certain elements of term deposits that you must be aware of. What could you be missing?

1. Checking up on your returns

In some cases, high interest savings accounts will be just as beneficial as a term deposit.

The Australian Securities and Investments Commission (ASIC) points out that in some cases, high interest savings accounts will be just as beneficial as a term deposit. This is especially true given our low interest rate environment.

The Reserve Bank of Australia's official cash rate of 1.5 per cent is at a record low. While this means home loans are easier to manage, the other side of this is that term deposits and savings accounts may not provide adequate returns for your investment strategy. Speak to a financial adviser to find out if there is a way to turn term deposits to your advantage.

2. Putting all your eggs in one basket

The Federal Government guarantees your term deposit, up to a value of $250,000 per authorised deposit-taking institution (ADI). These are bodies like banks, credit unions and other lenders. You can invest more than $250,000 in a term deposit, but if this is all with one lender and something happens to the deposit, you will only be covered up to $250,000.

savings

However, spreading your investment across multiple ADIs will mean you get protection for $250,000 for every different deposit. Like with most wealth management strategies, diversification is key.

3. Forgetting to check your calendar

Term deposits can last anywhere from three months to a year, and in some cases even longer. This is because the fund matures, and will often automatically renew. However, many ADIs will conduct this renewal and your term deposit will go to a lower interest rate.

This is called dual pricing, and ASIC has conducted a thorough review, finding that most ADIs communicate the details of this effectively. But you still need to be vigilant, check when deposits renew, and find out if you can get better returns elsewhere once it matures. ASIC found that 11 per cent of term deposits rolled into lower interest rates automatically, impacting $1.9 billion of funds.

One of the simplest ways to address this is with a financial planner. Your local Yellow Brick Road representative can help you find the best term deposit rates, and advise you on whether automatic renewal should be allowed or if you should intervene. Get in touch to find out more.

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