Term deposits: Is 6.5% over five years right for you?

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Think long-term if you’re shopping for a term deposit. You may be surprised by how high the rates are if you’re prepared to lock in for more than a year.
It will often be the three- or six-month term deposit rates that banks and credit unions advertise in their front windows and online.
At the moment the top six-month term deposit if you have $25,000 to invest is UBank’s online TD, which pays 5.95%. Several others have rates of 5.8% or higher (see the table at the end of this story for the best rates available at 29/2/2012).
However, if you’re prepared to stash your cash for a longer period of time, there are some excellent deals on offer at the moment.
One-year term deposits are currently lower than the shorter term deals so they are not the best option right now. That’s because the banks are still factoring in the possibility that the official cash rate will fall at some point during 2012.
Anyone with a longer-term timeframe should have a close look at the five-year term deposit rates on offer.
Arab bank, for instance, is currently offering 5.8% for six months but will pay 6.5% if you lock in for five years. Likewise, Rabo Direct is currently paying 5.8% for six months, 5.6% for a year and 6.5% for five years.
There are, of course, some golden rules you should stick to when investing in a term deposit, or any fixed-term investment for that matter.
1. Keeping your money in cash is all about security. You’re foregoing  the much higher potential returns you can generate from growth investments like shares in return for more security, so at least make sure your money really is secure. Only take out a term deposit with an ‘approved deposit-taking institution’, or ADI, to ensure your money is government-guaranteed up to $250,000.
2. Shop around for the best rate. When it comes to stashing cash, there’s no point staying loyal. You can take out a term deposit with any ADI – it doesn’t have to be the one you do your other banking with. So compare all the different rates on offer carefully.
3. Renew with care. You’ll get a letter prior to the renewal date but if you don’t take action your term deposit could be renewed automatically at a very unattractive interest rate. So make sure you open all mail relating to your term deposit and act quickly – when it matures you need to go through step 2 above again.
4. Choose the right term for your needs. Exit penalties are usually small if you need to get out of a term deposit early but you will be forfeiting all the interest payable. So it’s worth choosing the term that matches your needs and timeframe.
Best six-month deals Best one-year deals Best five-year deals
UBank online 5.95% Rabo Direct 5.6% Arab Bank 6.5%
ME Bank Super Members 5.9% Bankwest 5.5% Rabo Direct 6.5%
Citibank Short-term 5.85% AMP 5.5% Macquarie 6.5%
Bank of Queensland Premier 5.85% ING Direct 5.4% Westpac/St George/Bank of Melbourne 5.8%
Arab Bank 5.8%   Bendigo Bank 5.75%
Rabo Direct 5.8%    
Source: Mozo
-- By Jackie Pearson

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