Term Deposits - Interest paid at maturity?

It depends on the term of the deposit. For shorter terms (no more than a couple of months), payment at maturity is neither here nor there, but for longer terms (eg up to 1 year or more), you really want to see the interest paid more frequently.

Ideally, you would like to see interest paid monthly with the option of adding the interest to the deposit (as opposed to having it paid into a separate bank account). This way the interest itself earns interest in subsequent months. It's called compounding!

Being paid at maturity is not really a problem (interest rates are often slightly higher to compensate) - it all comes down to which option is going to give you the best return.

 

I don't actually think many term deposits give you the option of having interest paid monthly and compounded - I think they require you to have the monthly interest paid into a separate bank account.

To get the benefit of compounding, you'd need a regular high-interest savings account, which typically paid lower rates of interest - although some bonus rates for automatic savings plans and such, can raise the rate quite close that of term deposits.

 

Just doing some sums, while you can't get the benefits of compounding your term deposit interest by having your interest paid back into your term deposit monthly, you can achieve almost the same effect by having your term deposit interest paid into a high interest savings account.

Let's use UBank as an example:

12 month term deposit, interest paid at maturity, interest rate = 4.7%

So $10,000 invested for 12 months will earn you 10,000 * 0.047 = $470

12 month term deposit, interest paid monthly, interest rate = 4.6%

So $10,000 invested for 12 months will earn you 12 monthly payments of $38.33, for a total of $460 earned

Now, if we have our $38.33 paid into a UBank USaver account earning 3.96% (we'll assume no bonus interest), then at the end of month 1, your $38.33 gets deposited (no extra interest in first month), so and the end of month 2, you've earned an extra $1.52 in interest.

Add this $1.52 to the original $38.33, plus the second month of interest from the term deposit, a further $38.33 and we now have $78.18 in our USaver account earning interest.

At the end of 12 months, the additional interest earned from the USaver account is $8.44, added to our $460 from the term deposit, and we've made $468.44, only a little shy of the $470 we would earn from an interest paid at maturity deposit.

If we also qualified for the bonus interest on our USaver account, taking our rate to 4.66%, it gets us even closer, with our total interest earned being $469.95 at the end of 12 months.

So, if you don't mind waiting 12 months for your money, having interest paid at maturity will still earn you more (in this example), but if you prefer getting your cash sooner, you can still earn a decent return by compounding your interest earned in a high interest savings account (provided you don't just spend the money!).