A term deposit is a type of short-term investment that can only be withdrawn once the term is over. Usually, the term is shorter than a GIC, sometimes coming in as low as one month.
As with everything in personal finance, there's no catch-all investment type that's good for everyone. So in this article, we'll explore how term deposits work and compare them with other alternatives so you can see if they're right for you.
Key Takeaways
- A term deposit is an investment where your money is locked up for a set amount of time
- Term deposits mature between one month and a few years.
- Term deposits cannot be withdrawn early without penalty.
How a term deposit works
Term deposits are investment accounts where clients invest money for a higher rate of interest than standard savings accounts. The main difference is that these accounts are for fixed terms – funds cannot be withdrawn until the term is over, otherwise you'll be penalized.
Because the money is "stuck" in the account for a longer period of time, the bank will reward you with better interest rates. The money in turn gets used by the bank to use for loans and other purposes.
These term deposits are usually guaranteed, meaning your principal is protected – you won't lose your initial investment no matter what.
Of course, because these are less risky, you won't earn as much as some other investments, but you won't stand to lose any money. If you're a conservative investor who does not have a tolerance for risk, a term deposit is an excellent choice as a short-term investment.
Term deposits can be opened at most banks, including online banks.
Term deposits vs. GICs
GICs differ from term deposits mainly in terms of the length of term. In short, you can cash out a term deposit sooner than a GIC. Term deposits usually have a term from one month to one year (with some exceptions), whereas GICs have terms that are usually between 1 - 5 years.
Otherwise, these two are quite similar. GICs also can't be cashed in before they mature (barring a penalty).
4 benefits of term deposits
Here are 4 benefits of putting your money in a term deposit.
1. Low risk
Compared to other investments, most term deposits guarantee a certain interest rate and also ensure that no matter what, your principal is secured and you'll get that back in full at the very least.
However, the rate of return on term deposits will generally be lower than higher-risk investments like mutual funds or stocks.
Term deposits are also backed by the CDIC, meaning that up to $100,000 is covered. Smaller credit unions may have protection under their own provincial deposit insurance.
2. Fixed interest rates in troubling economic times
When the market is volatile, it's nice to have the peace of mind that you'll get your principal investment back, plus a set rate of return once it's time to cash out.
As a note, the longer the term, the higher the return will be.
3. Flexible terms for a wide variety of investment needs
Term deposits can vary in length of term and can also have special characteristics like being cashable after a certain period (with certain caveats like changing interest rates).
Though term deposits are normally fixed rate, there are some varieties that buck the trend:
- Index- or equity-linked term deposits, where the performance is linked to the stock market
- Escalating term deposits, where the interest rate goes up the longer you keep the money inside
4. Low minimum deposit
If you don't have too much to invest, a term deposit generally does not require as high of an initial investment as some other investment types do, making it more accessible.
Can you break a term deposit?
If you need to take your money out before your term deposit's maturation, it's possible. But you will very likely be subject to a penalty and you may also be required to give the bank advance notice.
There are 2 common penalties that can be applied:
- Early withdrawal fee: A fixed penalty, usually around $30
- Interest rate reduction: Based on a percentage of the term that has elapsed, you may be subject to a reduction in interest rates. The longer you've had your money in the term deposit, the lower the reduction.
Term deposit alternatives
If a short-term or low-risk, low-reward strategy isn't on your radar, we've got a few other types of investments that may be better suited to your investment needs. We only listed a few, but there are many more that you can choose from.
High interest savings accounts
High interest savings accounts have higher returns than normal savings accounts but give you the option to easily withdraw the money without any penalty (excluding transaction fees, if applicable).
- Pros: More liquid than term deposits – no penalty for withdrawing money
- Cons: Lower interest rates
Bonds
Bonds are normally issued by governments or corporations to raise funds. Bonds may not always be guaranteed either, and may have a variable interest rate based on market conditions. You can also trade bonds and make money off of them, and the terms can range from short (less than a year) to long (over 10 years).
- Pros: Potentially higher interest rates
- Cons: Slightly higher risk
Mutual funds
You can think of mutual funds as pools of investments. This means that you'll get a portion of many different investments with other people, and the value of your investments change based on the market. These are riskier than term deposits in most cases, but the return can be substantially higher.
- Pros: Higher interest rates
- Cons: Higher risk
ETFs
ETFs are similar to mutual funds, but are traded on a stock exchange and can be invested in a diverse selection of commodities, equities, and industries in different countries. Again, there is much more risk than in a term deposit, but the returns can be much greater.
- Pros: Higher interest rates, can be traded
- Cons: Higher risk
Crypto
You can also invest in cryptocurrencies using a crypto exchange. These are some of the most volatile, unpredictable investments, so we advise you to be cautious if you decide to go this route.
- Pros: Potential stratospheric gains
- Cons: Potential catastrophic losses
FAQ
Are term deposits worth it?
For short-term savings goals, term deposits are a good conservative option as you are guaranteed your principal investment back, as well as a small amount of interest – more than you'd get with a high interest savings account.
What is a good term deposit rate?
It really depends on the term itself as longer terms almost always have higher returns. Plus, different financial institutions will have different rates. As of 2024, 1-month term deposits may see rates as high as 3%, 3-month terms may be as high as 4%, and 6-month terms may be as high as 5%.
Can you open a term deposit online?
Yes, you can open term deposits online. Online banks such as Manulife offer term deposits or short-term GICs with maturation periods of as short as 30 days.
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