A 6-month term deposit is a short-term savings investment with a fixed interest rate. It's one of many term options that range from 1 month to 5 years. This option could be good if you're looking for short-term growth, are hesitant about longer commitments, or hope to lock in high interest in case of rate cuts.

Pros and cons of a 6-month term deposit

While 6-month term deposits have a few pros and cons that are worth noting. These include:

Pros

• Secure investment: The Australian government guarantees term deposits up to $250,000 with authorised deposit-taking institutions in the unlikely case the provider collapses.

• Guaranteed return: Term deposits come with fixed interest rates, so you know exactly what you'll earn. You can calculate precisely how much your investment will grow by the end of the 6-month term.

• Protection from rate decreases: Since your rate is locked in, you won't be affected if your provider lowers interest rates during your term.

• Minimal management required: A 6-month term deposit is a "set and forget" investment, unlike some high interest savings accounts, which may require meeting conditions to maintain your interest rate.

• Flexibility to re-invest: At the end of a 6-month term, you can re-invest your funds, potentially benefiting from any short-term interest rate rises. With longer-term deposits, you're locked into the same fixed rate for extended periods.

Cons

• Limited access to funds: If you need to withdraw your money before your term deposit matures, you'll likely face penalties such as early withdrawal fees (depending on the provider).

• Unable to add funds: Once you've invested in a term deposit, you cannot add to the initial investment until the term has matured. To continue investing, you'll need to lock into a new term.

• Missing rate increases: If interest rates rise during your 6-month term deposit period, you won't benefit as your interest rate is already fixed.

Automatic rollover

Many providers automatically reinvest both your deposit and interest into another 6-month term when your current term matures. This feature often includes loyalty bonuses and helps your savings compound faster.

However, an automatic rollover might place your funds into a term with a lower interest rate than what's currently available. Always compare current offers before your term ends.

What features to look for in a term deposit

When comparing term deposits, it’s good to keep a couple of these features in mind:

• Interest rate: This determines your return, so higher rates mean better earnings. Also, check when interest is paid as some term deposits have monthly or at maturity rate payouts.

• Term length: Term deposits have fixed timeframes ranging from 1 month to 5 years. Compare interest rates across various investment terms to find the optimal balance for your financial goals.

• Fees and penalties: While most term deposits don't charge set-up fees, early termination can trigger withdrawal fees or interest penalties. You might forfeit accrued interest if accessing your money before maturity.

• Projected earnings: Before committing your funds, use a term deposit calculator to estimate your potential returns and determine if the investment aligns with your financial objectives.

Comparing term deposit and savings account options

Who might you consider a 6-month term deposit?

This option is better for savers prioritising security with certain returns and those with short-term financial goals like saving for a holiday or a home loan deposit.

If you expect interest rates to fall soon, a 6-month term allows you to lock in higher rates. You can test term deposits without extended commitment, and those with surplus money can lock cash away for later.