A term deposit is ‘setting and forgetting’ an amount at your bank while earning a higher rate of interest than a savings account.
Now, what if you decide to break a term deposit? Do you have to notice your bank? What happens when the deposit matures?
After you set up or reinvest a term deposit, most banks have a cooling-off period. During this time, you have the option to cancel the term deposit, change the amount, or change the terms. However, you won’t earn any interest if you cancel it.
Some banks may let you break your term deposit in the first 30 days with no penalty, but no interest, though. Apply to your bank outside the cooling-off period if you want to withdraw the funds early.
Many Australian-owned banks have introduced tougher rules for early withdrawals of term deposits. Until recently, they didn’t require customers to give notice (31 days) to break a term deposit. The same notice period has been introduced for their New Zealand subsidiaries.
On account of the global financial crisis, the Australian regulators want the banks to have enough funds to cover withdrawals and not default on loans. Term deposits are part of a liquidity coverage ratio, which determines how much money banks must have on hand.
Many believe that The Reserve Bank in NZ will introduce similar regulations soon.
There are penalties if you break a term deposit early. It can be a reduction from the original rate or the actual term of your investment. You may be charged a fee, your interest rate may drop, or end up with no interest at all.
What if you’ve already been paid interest before breaking your term deposit?
You may receive monthly interest paid into your regular bank account, while the amount you withdraw gets reduced. This is to reflect the difference between the payments already made and the current payable.
Note: An early withdrawal of a term deposit can result in you overpaying withholding tax on any interest you’ve already received. In this case, apply for a refund by contacting Inland Revenue (IRD).Are Term Deposits A Good Investment? Click To Tweet
You should receive the original interest rate on anything you leave even if you don’t withdraw the full amount of your term deposit — so long as it doesn’t drop you to a lower tier of interest. Usually, you’ll get the rate that applied to the lower tier at the date of your original investment.
Some banks allow withdrawal up to 20% of your term deposit for investments over certain terms, without any reduction in interest. These withdrawals can’t drop you into a lower tier.
No notice is required if you need to break your term deposit due to hardship. The following are what may qualify as hardship:
- medical bills
- funeral costs
- costs due to a disaster.
You’re required to provide evidence as the bank makes the decision whether you’re in hardship. If you have funds in other accounts, you may be required to use it before you’re allowed to break a term deposit.
What happens next if your term deposit nears the end of its term?
Usually, you’ve given the bank instructions on what you wanted your term deposit to do when you set it up. The principal and interest can be paid into another bank account, or roll them over for another term.
Your bank will most likely contact you before your term deposit is due to mature.
A loan can be one of your options if you’re considering an access to funds but you may not have a large asset to secure a loan.
You can choose unsecured loans if you don’t want to risk your assets and you’re unsure about your repayments.
Pretty Penny Loans offers unsecured loans in NZ — apply online or over the phone. What you need to provide are personal details and bank statement.
PPL’s unsecured loans features:
- loans up to $1,000
- flexible loan lengths
- flexible repayments so can repay on a weekly or fortnightly basis
- scheduled repayments
- early loan repayment
- utilised direct debit facility to set up repayments.