Term deposits help people grow their savings without any of the risks involved with stocks, real estate, or other types of investment products.
A term deposit is similar to a Guaranteed Investment Certificate, or GIC. In both cases, investors visit their preferred financial institution and agree to deposit a minimum amount of money, typically a few hundred dollars but sometimes as much as a few thousand, for a fixed length of time ranging from 30 days to five years.
In general, GICs have a longer investment period than term deposits, usually one to five years, and pay a higher rate of interest as a result. Both term deposits and GICs tend to offer better interest rates than most savings accounts.
Throughout the time the money is deposited, it’s protected by provincial deposit insurance and earns a fixed rate of interest. The principal is guaranteed to grow and cannot decrease. Once the term is up, the money and the interest are returned to the investor or can be rolled over and deposited for another term.
For instance, if you invested $1,000 in a one-year term deposit with a rate of 2.5 per cent, you’d have $1,025 after 12 months: your original investment plus $25 in interest. If you make a longer-term deposit, your interest will compound in future years (meaning you’ll earn interest on your interest, giving you more bang for your investing buck).
It’s important to note that once deposited, the original investment is generally off-limits until the term finishes. With some term deposits, investors must pay a penalty, or forfeit their earned interest, if they withdraw their money ahead of schedule. If you think you might need to access the money you’re investing, make sure to get a redeemable term deposit (one that permits withdrawals before the full term is up) or consider an alternate investment strategy, such as a high-interest savings account.
One potential drawback of term deposits is that interest rates don’t always keep up with inflation, a measure of how much prices are rising. For example, if you have a term deposit that earns 2.5 per cent interest but the inflation rate is 3 percent, consumer costs are rising more quickly than you’re growing your savings, and the $1,025 you’d have after 12 months doesn’t go as far as your $1,000 did at the start of the year.
Here’s a closer look at a few common types of term deposits.
Redeemable Term Deposit
As described above, a redeemable term deposit allows you to withdraw some or all of your original investment before the term is up. However, this may result in you forfeiting any interest earned so far or paying some other penalty in order to access your money ahead of schedule. Fees and penalties vary by financial institution, so shop around for the best deal if there’s a chance you’ll need your money before the term expires. While redeemable term deposits offer investors better flexibility, they tend to pay lower interest as a result. Also, unlike other term deposits, they can’t be held as registered investments with tax benefits, such as a Registered Retirement Savings Plan (RRSP) or Tax-Free Savings Account (TFSA).
Non-redeemable Term Deposit
This one is exactly as the name suggests. Non-redeemable term deposits are locked in, meaning there’s no way to access any of your investment until the end of the term. In exchange, you earn a higher rate of interest than you would with a redeemable term deposit.
Growing Rate Term Deposit
If you’ve got time to let your money mature, consider investing in a growing rate term deposit. The interest rate increases a little bit each year, giving you a better eventual return. Deposits are locked in for five years, but some financial institutions offer an option to withdraw your money without penalty part way through the term.
Index-Linked Term Deposit
If you’re looking for a chance to do more with your money, but don’t want the risk of full exposure to the stock market, consider an index-linked term deposit. It’s an ideal combination between the security of a term deposit and the unlimited earnings potential of the market. Your deposit earns a minimum interest rate over the course of the term, but often pays a better rate that’s linked to the performance of an index, or basket, of multiple stocks and investments. In this way, investors avoid the ups and downs of individual stocks while still benefiting from the rising tide that slowly lifts the overall market.
Discover Moya Financial’s range of term deposits here.