Term Deposits Explained Like You're 5

A term deposit is a savings account with two rules: you lock your money away for a set period (the "term"), and in return the bank guarantees you a fixed interest rate for the whole time. You can't withdraw early without penalty, and the rate can't go down even if the RBA cuts rates the next day.

That's it. That's the whole product. Everything else — 3-month vs 12-month, monthly vs end-of-term interest, rollover vs redeem — is just variations on those two rules.

Current term deposit rates in Australia for April 2026 sit around 4.30%–4.80% p.a. for 6–12 month terms, depending on the bank. Bonus savings accounts can beat that today (some are around 5.25%), but savings rates can drop overnight while your term deposit rate is locked.

You put $20,000 into a 12-month term deposit at 4.60% p.a. with interest paid at maturity. Here's exactly what happens:

• Day 1: $20,000 leaves your everyday account, arrives at the term deposit.
• Days 2–364: Nothing. You cannot touch it. The rate is locked at 4.60% regardless of what the RBA does.
• Day 365 (maturity): You receive $20,000 + $920 interest = $20,920.
• Day 365 + 1: If you do nothing, most banks automatically roll it over into a new term at whatever the current rate is. If you want the money back, you usually have a 7-day "grace period" to redeem it.

That $920 is taxed as normal income — the bank reports it to the ATO and it shows up on your pre-fill at tax time. If your marginal rate is 32%, you keep $625 after tax.

If you'd chosen monthly interest payments instead of at-maturity, you'd get $76.67 paid into your nominated account each month — slightly less total because you're not earning interest on your interest. The difference on $20K over 12 months is about $7, so don't sweat it.

You can always access your money in an emergency, but breaking a term deposit early is expensive on purpose — banks want to discourage it.

The standard early-withdrawal penalty works like this:

• You give the bank 31 days' notice (some banks allow instant break for hardship).
• The interest you've earned so far is reduced — often by 50% to 90%, depending on how much of the term has passed.
• On a 12-month TD broken at 6 months, expect to get maybe 20–30% of the interest you "should" have earned.

On the $20,000 example above, breaking at 6 months might mean you earn $140 instead of $460. You still get your full $20,000 back — you just lose most of the interest.

This is why term deposits are terrible for emergency funds. Your emergency fund needs to be accessible today, not in 31 days. Keep emergency money in a high-interest savings account; use term deposits for money you know you don't need soon.

The eternal question. Both earn interest. Both are bank-guaranteed (under the $250K Financial Claims Scheme). So which is better?

Feature	Term deposit	High-interest savings
Rate (Apr 2026)	4.30%–4.80% locked	4.00%–5.25% variable
Rate can drop	No — locked	Yes — anytime
Access	Locked for term	Instant
Bonus conditions	None	Often: min deposit, no withdrawals
Government guarantee	Yes (first $250K)	Yes (first $250K)

Rule of thumb. If you think rates will fall over the next 6–12 months, lock in a term deposit now. If you think rates will rise, stay in a bonus savings account. If you don't know (most of us), split the money — half in each.

The RBA cash rate in April 2026 is 3.60% and economists are expecting at least one more cut. That makes locking in a 12-month TD at 4.60% more attractive than it was a year ago.

Opening a term deposit is faster than opening a regular savings account because you don't need card access, BSB cards, or anything physical.

1. Compare rates. Check at least 3 banks. Online-only banks (Rabobank, ING, Macquarie, Judo) usually beat the big 4 by 0.3–0.5%.
2. Pick your term. 6 months is the current sweet spot — you lock in today's rate but aren't stuck if rates rise. 12 months wins if you think cuts are coming.
3. Pick interest frequency. "At maturity" earns slightly more; "monthly" gives you income if you need it (e.g. retirees living off savings).
4. Apply online. You need 100 points of ID and your everyday bank account details to transfer from.
5. Set a calendar reminder 1 week before maturity. This is the critical step. If you do nothing, the bank will auto-rollover into a new term at whatever the current rate is — and that rate is usually their worst. Always shop around at maturity.

Use our term deposit calculator to see exactly what you'll earn on different amounts and terms, and our savings calculator to compare against a regular savings account.