A term deposit locks in funds for a fixed period of time, although usually at a higher interest rate than online, call or savings accounts. Banks do not legally have to allow customers to break term deposits, that is, give back the money early. Whether you can break your deposit will depend on the terms of your contract with the bank. In most cases, you can do so only if the bank agrees.
Some banks offer a cooling-off period, during which you can cancel your term deposit and get back your principal without interest. Some banks require a certain period of notice before letting you break your term deposit (although proving hardship may avoid such notice).
If the bank agrees to break your term deposit, it will probably reduce the interest rate on the funds you’re withdrawing. It may also seek to recover interest that was paid at the higher rate while it had the money. The reduction in interest may depend on how much you deposited, current interest rates and the length of the investment term.
Before you commit
Read the investment statement and any relevant terms and conditions before you agree to invest your money in a term deposit. If unclear whether there is a cooling-off period or what you may need to do to break your deposit, ask your bank first.
If there is a chance you may need the money before the term expires, consider a shorter term: some savings accounts may actually pay a higher amount, especially if the term is short.
If you might need your money before the term expires, it may be better to consider a shorter term option like a savings account.
Failure to mention fee misleading
Tama deposited $400,000 with his bank for two years at 5.25 per cent. A year later, he went to the bank to discuss breaking the term deposit and using most of the money to buy a property. He asked the staff member whether he would face any penalties. He was told he would receive interest on just the money he left in for the balance of the term.CASE 2
Bank properly advised that deposit was not earning interest
Alex was paid in United States dollars for some shares she sold. She decided the exchange rate was unfavourable, so rather than convert them to New Zealand dollars she opened a foreign currency term deposit account. The term was 180 days, and Alex instructed the bank to automatically reinvest the money for the same period at the end of each term.CASE 3
Notice provision did not change policy
Morgan had money invested in a term deposit. When each term matured, the money would be rolled over for another term. Morgan understood he could, if necessary, get immediate access to his money before a term expired, subject to an interest rate adjustment.
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Updated July 2021