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The interest rate comparison stand-off

As the cost of living continues to increase, Aussies will do almost anything to make a buck when investing. The first port of call is often a low-risk term deposit account.

Unsurprisingly, investors don’t like to hear about stock market crashes. The GFC’s aftermath highlighted that investing can be a risky business, with so many high-risk investors losing money and major investments to the banks and companies that went bust.

Since then, it’s become almost essential for consumers to look for certainty, opting for low to medium-risk investment options. So what are the main reasons for term deposits coming back into fashion?

The benefits of low-risk term deposit accounts

Perhaps the most alluring feature is that your money sits quietly at the bank, generating interest for a set period, and you don’t have to think about it or be subject to an interest rate drop, despite how the economy shifts. For some accounts, there aren’t even any managing fees. Term deposits are also safer than playing the stock market, and watching your savings grow is uncomplicated.

But perhaps more appealing are the high-yielding interest rates being offered on term deposits right now, as the banks furiously battle each other to secure funds from Aussie consumers instead of dried-up foreign sources that charge hefty premiums.

How then can you tell which term deposit is the best choice for you? After all, term deposits aren’t all the same, and there are a number of small print details you should familiarise yourself with.

Interest rates are everything

Albert Einstein is said to have described compound interest as the most powerful force in the universe, so not only should you take note of the interest rate offered on a term deposit when comparing deals, but how the interest is going to be calculated.

Some accounts will be paid daily, while others are paid fortnightly, monthly, quarterly or annually on term deposits longer than 12 months. Your investment will grow faster the more often your interest is credited to your account that’s the power of compound interest.

Know your limits

Next you should consider the term’s length. Know your limits and just how long you are prepared to go without dipping into the term. Otherwise you could be charged a penalty fee for breaking your agreement, depending on your provider.

If there’s a chance you may need your funds, consider choosing a shorter term or different product that’s flexible and allows you to access your money easier, like a high-yielding online savings account. RaboDirect currently offers a special variable rate of up to 5.6 per cent p.a. on balances up to $250,000. There are absolutely no fees, no minimum balance and interest is calculated daily, paid monthly.

Read the fine print

Aside from nasty break clauses, be aware of promotional honeymoon rates. These are terms with higher interest rates that only last for a set periodusually a few months. Once the honeymoon period is over, your term will be stuck with the ongoing rate. Some terms also require a minimum deposit amount to start.

For peace of mind knowing your money is safeguarded from a market crash, borrow from a lender that is on the Australian Government’s Authorised Deposit-taking Institutions list.

Michelle Wilding has been working as a freelance business and financial writer for several years and is a regular contributor to financial money saving website Moneyhound.