Term deposits: how they work and what breaking one early costs

How a term deposit works

According to Moneysmart (page updated 20 October 2026):

• You deposit money for a set term, usually between one month and five years, at a fixed rate.
• A minimum amount applies. Moneysmart gives $5,000 as an example.
• The page lists "when interest is paid" as something to compare: monthly, annually or at maturity.

Interest paid at maturity means you receive the lump sum at the end. Interest paid monthly or annually gives you income along the way. Ask which options the lender offers, because the same deposit can pay differently by option. Advertised rates on the term deposit board are advertised rates with a recorded date, not an offer to you.

A worked example

Round numbers for illustration only. This is a hypothetical rate, not a current one.

• Deposit: $10,000 for 12 months.
• Hypothetical rate: 4.00% a year, paid at maturity.
• Interest: $10,000 times 4.00% = $400.

Now suppose you must break it after 6 months. Moneysmart says you may receive only a proportion of the interest earned or none. If a lender paid you half the interest you had earned by then, you would get $200 times 50% = $100 (hypothetical: the real reduction is set by each lender in its terms). If it paid none, you would get your $10,000 back with no interest.

The point of the example is to show the range. Before you commit, find the early withdrawal clause and work out your worst case.

Breaking early: what to look for

Moneysmart says breaking a term deposit may mean a penalty, with only a proportion of interest, or none. It also says you may need to give up to 31 days' notice. How much is lost, and how the notice rule works, differs by lender and product, and it is in the product terms. Ask:

• How much notice is needed to withdraw early, and can I still be paid sooner in an emergency?
• How is the reduced interest calculated?
• Is there a fee on top of the reduced interest?
• Can I withdraw part of the deposit, or only all of it?

If you might need the money, a shorter term or an account that can be accessed (see the savings board) may suit you better, and you can compare the lower rate on offer against the cost of breaking.

Rollover and the grace period

Moneysmart says that if you do nothing, your term deposit may roll over into a new term deposit. The new deposit may carry an exit fee and a lower rate. Moneysmart's page does not describe a grace period after maturity. Ask your lender whether there is one, how long it lasts and what you can do in it (withdraw, change the term or add money). Diary the maturity date, and decide before it arrives what you will do with the money.

Laddering as a general idea

Laddering is a general approach, not a product. Instead of one deposit, you split your money into several deposits that mature at different times, for example one, two and three years. When the shortest ends, you can decide what to do with that money. It spreads maturity dates so that some cash comes free regularly, which reduces the chance you must break a deposit. It does not change the rate each deposit earns. Moneysmart's term deposit page did not cover laddering, so treat this as a general explanation and decide with your own situation in mind.

Tax and protection

• Tax. Interest on a term deposit is generally income you declare. The ATO's investment income page covers this, including when to declare it. That page did not load when we checked, so confirm the current rules at ato.gov.au or with a registered tax professional. This is general information, not tax advice.
• Financial Claims Scheme. Moneysmart says the scheme guarantees to pay you up to $250,000 to replace deposits if an institution fails, and covers only APRA-regulated authorised deposit-taking institutions (Moneysmart, updated 20 October 2026). Confirm the cap on the official pages.

Term deposit or home loan

Cash in a term deposit is not available to reduce home loan interest. Money in an offset account reduces the interest charged on your loan and stays available. A term deposit pays interest that is taxable, and is locked for the term. Which is better depends on your loan rate, deposit rate, tax and how soon you need the money. See extra repayments vs an offset and the live home loan rate board for advertised loan rates.