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Term Deposits - Interest paid at maturity?

Discussion in 'Money Management' started by ksan1989, 13th Feb, 2013.

  1. ksan1989

    ksan1989 New Member

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    Hi all,

    I am just wondering what are the advantages of disadvantages of investing in a term deposit when it says 'Interest paid at maturity?'

    I understand the concept that this will result into my interest being paid once my term deposit period is over but are there any associated benefits to this?


    Thank you!
     
  2. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    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.
     
  3. ksan1989

    ksan1989 New Member

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    Thanks!

    Oh I see - payment with the principal way doesn't have the compounding effect!
    Well, I don't want to be short-changed!

    I actually thought when you receive the principal and the interest earned, through the principal method you would still be given the benefits of compounding, clearly not.

    I appreciate the clarification Sim!
     
  4. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    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.
     
  5. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    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!).
     
  6. ksan1989

    ksan1989 New Member

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    Hey Sim,

    I did the comparisons and so fourth - UBANK seems to be the most reasonable in terms of a 12 month term deposit.
    The actual deposit will allow you to have a rate of 4.8% if you roll over.
    Other than that, to have easy access and a decent rate, the automatic savings plan yields a return of 4.66%, as you stated.

    My initial issue was why didn't your interest receive the compounding effect when a term deposit states 'interest paid at maturity.'
    Like you rightly stated, they compensate with a higher rate.

    I believe all in all, UBANK is the easiest option at this point in time.

    Thank you again for the extended clarification.