Managing your money

What is a term deposit?

4 min read


For anyone new to investing, term deposits can be a little confusing. But our beginner’s guide to term deposits will have you up with the play in no time.

What is a term deposit?

A term deposit is simply the phrase used to describe any deposit made at a bank or other financial institution for a predetermined, or fixed, period of time. In some respects it resembles a typical savings account - you deposit your money with the bank and the bank pays interest on it. However, the big difference is the fixed term part. This means after you’ve deposited your money it’s locked away for a specific period of time, usually anywhere from 30 days to five years. Think of a term deposit as a long term savings account.

Tip: The longer you commit to locking your money away, the more interest you’ll earn. Be realistic with the term, they’re not a quick win savings tool, so if you think you may need the money in 12 months, don’t choose a five year term.

Does that mean I can’t touch my money?

To a certain extent, yes. But that’s part of the attraction of term deposits - you can’t easily access those savings. It is possible to break the term deposit at any time, but you’ll need to give the bank notice (usually 30 days) that you want to withdraw the principal (that’s the money you originally deposited) early, and you’ll lose all or a portion of the interest you would have otherwise earned.

Tip: If you do need to break your term, your bank will be able to calculate for you exactly how much interest you’ll lose as a result.

Why would I want one?

Term deposits are great for people who have a lump sum of money that they’d like to grow over the long term. While all investments carry an element of risk, term deposits are safer than most and offer a clearly laid out plan for exactly how much interest your deposit can earn over a very specific period of time. In that regard they offer a high degree of certainty, and because your savings are essentially locked away, it’s a great incentive to not spend it.

Tip: Term deposits have a fixed interest rate. Much like a fixed rate home loan, it doesn’t matter if rates go up or down in the meantime, you’ll get the rate you signed up for at the beginning.

What are the benefits of a term deposit over a regular savings account?

Savings accounts are great if you need instant access to your money, however, if you’re sure you can do without it for a while, or if you have a specific savings goal, term deposits are an excellent long-term savings choice.

Tip: Before choosing a term deposit, make sure it lines up with your broader savings plan. Term deposits a great tool to grow your savings, but require commitment to make them work. Check our guide to savings goal-setting to make sure you’re on track.

How much money can I invest in a term deposit?

There are both minimum and maximum amounts of money that can be invested in a term deposit which can also have a bearing on how much interest gets paid. Again, if we take BNZ as an example, the minimum deposit for most terms is $2000 to $5000, and the maximum is $5,000,000.

Tip: Interest rates can be calculated monthly or annually depending on the kind of term deposit you opt for. In these cases, the interest will be paid into your account monthly or at maturity. Maturity is the word used to describe the end date of your term deposit. Once maturity is reached, you can choose to reinvest the money or withdraw it.

That sounds great, how do I get one?

This process will vary from bank to bank, but generally speaking it’s not much more difficult than opening a bank account. In the case of BNZ, if your money is already in one of your BNZ accounts, the process can all be done online. Simply choose your terms, read all the fine print (so you know exactly how long your money will be tied up for and the consequences of breaking the term) and it’s done. If your money is not with BNZ, you can start the process online but you might need to come and visit the bank to complete everything.

Tip: Once you’ve signed up for a term deposit you can make changes (or withdraw your principal) in the first seven days before everything is locked in.