Difference between a Term Deposit and a High Interest Savings Account?

• 

  poboy on 10/09/2016 - 20:17

  +1

  Your understanding is correct.

• 

  17833 on 10/09/2016 - 20:22

  +1

  Sure someone can provide better explanation, but possible guesses would be
  - Competition that may affect rates.
  - Banks looking at what rates may do in the longer term that may affect term deposit rates.
  Not sure if you are aware also that term deposits often pay interest at maturity, where savings accounts often pay interest monthly. Interest paid monthly compounds so in this situation a term deposit paid at maturity will have a very slightly lower effective interest rate than a savings account with interest pain monthly over the same period of time.

• 

  fossilfuel on 10/09/2016 - 20:26

  +1

  Perhaps the bank has offered a high interest rate for young people? I know that this isn't the case for most banks. i.e interest rates in the saving account is much lower than interest rate offered by term deposits.

  For my savings account, the interest rate is variable. It could be high for a while and then drop down to something pretty mediocre. I wouldn't count on it to build interest. Also, if you move funds from your savings account to your cheque account, it'll also affect how much interest you get.

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  Geekomatic on 10/09/2016 - 20:29

  +2

  High interest savings acct. isn't locked in—- term is at a set rate, so you'll never get less over it's lifespan. It also carries no, "you have to also do this other thing" (every week/month/etc) rule.

  If the interest rate drops on the savings acct, you lose.

  If the interest rate increases on the savings acct, you win.

• 

  YTW on 10/09/2016 - 20:33

  +5

  There's a few differences - whether they are of any advantage to you is up to your personal circumstances. The two main ones that pop to mind are:

  With term deposits once you lock in the rate it is fixed at that rate until the end of the term deposit. The high interest savings account is a variable rate and can change. This can be good if interest rates fall and you've locked in a rate, but bad if you lock in a rate and the interest rates go up. Some people prefer a predictable rate of return and are quite happy to forgo the opportunity for a higher rate than risk getting a lower rate.

  Another factor is when interest is paid - high interest accounts tend to be paid monthly, with term deposits it can be paid monthly, yearly or at the end of the term (just depends on what's offer - different banks offer lots of different options). You can use this feature to delay income into another tax year - for some people this can result in a significant tax saving some years, it just depends on individual circumstances.

  As to the rates - it's a whole combination of complex factors that affect them.

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  imprvn on 10/09/2016 - 20:34

  +2

  It does sound too good to be true. However, your understanding is indeed correct.

  I'm surprised why more people don't take advantage of high interest savings accounts versus term deposits. I suppose that term deposits present a safer bet on interest rates and therefore are more suited to those that are more risk-averse. However, that said, if you look around enough you're bound to find better rates on high-interest savings accounts compared to term deposits (with the exception of longer term deposits, such as 2-5 years).

  I've been using high-interest savings accounts (Ubank and ING Direct) for almost a decade and can safely say that I've enjoyed much higher returns (and liquidity) than if I had locked my money away in a term deposit. Honestly, the only reason why I'd choose a term deposit over a high-interest savings account is if I couldn't be bothered satisfying the requirements which most high-interest savings account have.

  Hope that helps!

  • 

    RockyRaccoon on 10/09/2016 - 20:45

    +3

    I've been using high-interest savings accounts (Ubank and ING Direct) for almost a decade

    Absolutely, historically this was the case.

    But 3 months ago I took a 12 month term deposit at 3.10% with Ubank. Now Online savings rate (Ultra) is offering 2.87%. While its only .20 of interest its a 10% more return with the TD.

    But this is with money I know I wont need over the next 12 months. I have other funds in the Ultra account that I can use should I need to.

    So TD's are now becoming more competitive than they were 1-2 years ago.

    With new requirements for liquidity etc the banks are looking for more committed money than at call deposits, hence the better rates now

    • 

      amkssg on 11/09/2016 - 03:02

      But you also run the risk of interest rates increasing (though not likely), and being stuck with the TD rates.

      Also, I don't understand how you got "10% more return with TD".

      • 

        RockyRaccoon on 11/09/2016 - 03:12

        Ultra account =2.87%

        10% more than this 2.87% =.28% which imeans the return of 10% more would then = 3.05%

        The difference between the 3.05% and my 3.10% on the TD is reflected by the TD being paid at end of 12 month term whereas Ultra account is interest paid monthly.

        BTW i did round the figures, so I guess I should have said approx 10%

      • 

        amkssg on 11/09/2016 - 03:29

        @RockyRaccoon: That's not correct since interest in Savings Account compounds, while TD doesn't.

        So, if ultra account = 2.87%pa paid monthly, then the effective interest rate is actually 2.91%.

        6.5% more than this 2.91% =.19% which means the return of 6.5% more would then = 3.1%.

        So, it's 6.5%, not 10%.

        HOWEVER, you have to remember that unlike TD, interest in Savings Account is being paid and compounded on any new deposits, which means the difference is actually LESS than 6.5%.

        Also, it's not really 6.5%, since you are effectively only getting AT MOST 0.19% more interest (assuming interest rates do not change).
        All it takes is for interest rates to increase by 0.19% and your TD becomes less valuable.

      • 

        RockyRaccoon on 11/09/2016 - 03:47

        +1

        @bsmksg: Ok I stand corrected on the 10% as I said I did some quick in head maths plus again my head was wrong when explaining it to you 2.87% with 10% = .28% which when added to 2.87% = 3.15%

        So on the 6.5% we would be in agreement.

        On the adding to concept I dispute your reasoning, as while TD's cant be added to, your assumption is that the money just sits in an non interest bearing account. I can put other money in an at call account, so nothing lost there , unless my AM brain is playing tricks with me again. 😀

        I also would not disagree with the impact of Interest rates increasing, meaning a TD could be worse off.

        This possibility was canvassed by others like imprvn, so I didnt reiterate this.

        Given that the Economists still predict a further possible cut of .25%, that is what I made a call on in my case. But like all investments if the predictions are wrong then the impact will be different.

        Like all investments this is just one aspect. My point wasnt to recommend using the same strategy as I did (I have the historic benefit of one rate decrease already).

        What I was doing was giving another aspect for the OP to consider. And of course it will depend on how much you have to invest etc

      • 

        amkssg on 11/09/2016 - 03:56

        @RockyRaccoon: Just saying. I don't disagree with you.

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  onetwothreefour on 11/09/2016 - 08:48

  +1

  I remeber opening my first term deposit in 2008, i was getting 8.25% wish i had locked that rate in for longer than 12 months!

  • 

    Marcsie on 11/09/2016 - 12:25

    -1

    How about Resi or Pyramid Building Society offered 18% term deposit interet in the early 90's :)

    • 

      onetwothreefour on 11/09/2016 - 19:18

      i wasn't in Australia then :-(

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  cheesecactus on 13/09/2016 - 00:07

  Several years ago I used to have a couple term deposits because they offered better rates. Obviously, relinquish control of your money for a year and we'll give you a better rate. Also back then the interest rate was slowly but surely dropping every few months, so i latched on to the 4.20% rates etc.

  But now banks like Ubank give even better rates in their savings accounts. Plus interest rates are pretty low across the board.