Despite bank interest rates for savings being at historically low levels, term deposits remain popular investments for the defensive part of an investment portfolio. I also support the use of term deposits; in the current environment of low, but gradually rising, interest rates, they are often a better alternative than bonds, where there is a real risk of capital losses if interest rates do rise (note the opposite applies in times of declining interest rates).
But sometimes life comes along and interrupts the best laid plans, and you need access to your term deposit money in a hurry. What happens?
Usually banks will allow you to break term deposits. However, the rules applied around these breakages vary significantly from bank to bank.
In a recent example, a client with similar term deposits held at both ANZ and RaboDirect needed to get cash in a hurry to settle a house purchase. For RaboDirect, the term deposit could be broken immediately, with funds available that day, no loss of accrued interest, and no other costs incurred. However for ANZ, there was a 30 day notification period to break the term deposit, and a loss of interest of 3% for the portion of the term deposit broken – which would be charged back if the interest had already been paid out.
These are significantly different treatments between banks of essentially the same situation.
The moral of this story is when making term deposit investments, understand the bank’s policy if you need to break the term deposit for any reason. There are other factors to consider with term deposits than just the headline interest rate.
PS. This is not a recommendation for RaboDirect over ANZ (or any other bank) for term deposits. For RaboDirect, breaking term deposits can sometimes result in penalty charges – it depends on the term, current interest rates, and historical interest rates. The point is that this is important knowledge to be armed with when making term deposit decisions.