What a term deposit actually is
A term deposit is money locked into a bank for a fixed period (commonly 6 to 24 months, occasionally longer) in exchange for a guaranteed interest rate. Because you agree to leave the money alone, the bank pays you more than an on-call savings account would. The rate is quoted as a simple annual percentage (for example 5% p.a.), and the interest is usually paid either at maturity or monthly, depending on the product.
Two things people get wrong:
- The rate is generally simple, not compounding within the term. Unless you renew and reinvest the interest, it does not build on itself mid-term. This means a 24-month deposit at 5% is close to 10% of your money in total gross interest, not 5% compounded twice.
- Your principal is safe but locked. You are not gambling on markets, but neither can you reach the money. If you withdraw early you almost always pay a penalty or lose most of the interest.
Use our term deposit calculator to see the gross interest, the tax at your rate, the net you keep, and your maturity value, paid at maturity or monthly.
How the tax works: RWT and PIE
You do not add term deposit interest to a tax return the way you might with other income: the tax is withheld before you receive it. The rate depends on which product you pick:
- Standard term deposit: subject to resident withholding tax (RWT) at the rate your bank holds for you, up to 33%. Give your bank your correct rate; getting it wrong just means an end-of-year square-up with the IRD.
- PIE term deposit: offered by many banks, taxed at your prescribed investor rate (PIR) of 10.5%, 17.5% or 28%. For most people this means less tax withheld than the full RWT rate.
The headline "rate" quoted by a bank is before tax. What matters to you is the net, the rate you actually keep after your withholding. Comparing two deposits on gross rate alone usually flatters the one with the higher gross but a worse fit for your tax rate.
If you also owe a mortgage, parking money in an offset account avoids mortgage interest that was never taxed, which for most people beats a term deposit's after-tax return, and the money stays reachable. A term deposit only starts to look better once you have no debt to offset.
The early-withdrawal rule
Needing the money early is the one scenario that changes everything. Most NZ term deposits charge a break fee or reduce the interest paid if you withdraw before maturity, and some are not redeemable at all until the end. The rule of thumb: only lock away money you will not need. Anything that might be needed (an emergency fund, a near-term planned expense) belongs somewhere on-call.
That tension between rate and flexibility is why people ladder.
Laddering: get the rate without locking it all
Laddering means splitting your total across several term deposits with staggered maturity dates instead of one big fixed term. Say you have $30,000: instead of locking all of it for 12 months, put $10,000 in a 4-month deposit, $10,000 in an 8-month, and $10,000 in a 12-month. Every four months a ladder rung matures, giving you cash to use or reinvest, and because each rung renews at the current rate, you are never all-in at a single rate or a single moment.
Laddering gives three practical benefits:
- Always something reachable: a rung matures regularly, so you get some of the flexibility of savings.
- Rate smoothing: when rates rise you capture the new rate on the rung that matures; when they fall you are not locked into the old high rate on everything.
- Shorter commitment: you never wait a full year to see any of your money.
The cost is a little bookkeeping: more deposits to track and maturity dates to remember. Some people prefer one fixed term for simplicity. The right answer is whichever keeps you comfortable enough to leave the money alone. That is the whole point of the product.