Who should consider using fixed-term deposits and why?


Investment has become a new buzzword. Using deposits to invest money, however, has become less popular and there are several prejudices related to this. In reality, fixed-term deposits are a risk-free method for saving money for a certain purpose and to prevent spending the savings before the specified time, while the money being saved is also earning further income, says Kristiina Toomei, Product Manager of Deposits of Holm Bank.

There is a reason why fixed-term deposits are the most popular of the depositing services provided by financial institutions. The advantages are the interest rate which remains unchanged for the duration of the depositing period and the guaranteed amount which will thereby be added to the amount deposited. The specific date for the withdrawal of the deposit may seem like an unnecessary restriction but it helps to serve its purpose – to make sure that it is easier for the depositor to resist the temptation to spend the money.

What are the main prejudices related to depositing?

One of the most common fears related to depositing money is the fear of simply losing the money. It is important to be aware that there is no such risk when depositing in local banks because there are strict requirements for the capital and operations of the banks, and compliance with said requirements is subject to inspection by the Financial Supervision Authority. The deposits opened in these banks are also guaranteed by the Guarantee Fund in the extent of 100,000 euros per depositor, which means that even if the bank goes out of business, depositors will not lose their money.

Another common fear concerns the expenditure accompanying depositing – people fear so-called concealed fees which will ‘eat up’ the interest income earned, as well as the savings deposited. In actual fact, no contractual or maintenance fees are applied to opening a deposit at a bank and the promised interest income is guaranteed to the depositor in the entire extent without the bank deducting anything to cover their costs. It should, however, be kept in mind that banks are required to withhold income tax from the interest income earned by a private depositor.

How does depositing work?

Accepting deposits and granting loans are among the main functions of banks. They are tightly interrelated: customers keep their savings in the bank in order to earn interest, the bank lends the money received to private persons and business and collects loan interest. Thus, the interest income earned by depositing comes from the loan interest of the same bank.

While most of the terms and conditions of the fixed-term deposits offered by Estonian banks are quite similar, the interest rates offered by some are several times higher than those offered by others. As larger banks do not need further resources to grant loans, they also do not need to use deposits aggressively, thus, they usually offer a lower interest rate, which is close to zero in the case of longer-term deposits. Smaller banks in the active growing phase need to involve more resources and are thus also offering significantly better interest rates. For example, the current annual interest rate on fixed-term deposits offered by Holm Bank is 2.5% which is better than those of the fixed-term deposits of any other bank.

Why should one deposit their money?

Fixed-term deposits will not make one rich but will help to save money for a specific purpose and to fight against inflation while growing one’s savings. It is possible to earn more by investing in funds or shares, but sometimes, investing without risks and making sure that the value of the money will not decrease over time are more important than the potential returns. Another advantage of depositing compared to investing is that depositing is simple and the customer is not required to have financial knowledge or experience.

There are many situations in which depositing funds in a fixed-term deposit is beneficial. For example, you might need to save money for a specific larger expenditure, such as for a down payment for your new home, for a dream holiday, or for renovation works. You might also like to collect and increase your savings for potential unexpected expenses (a so-called ‘peace of mind fund’), to secure the future of your children, or for your own additional pension fund.

Peace of mind is an increasingly popular reason for opening fixed-term deposits, as having a fixed period of depositing helps to retain self-control, but if there is an actual need to use the funds, the deposit contract can be terminated and the principal amount taken into use before the maturity date, on agreement with the bank. Banks will usually apply an added fee in the case of premature termination of a deposit contract, but fortunately, the amount of the fee forms quite a small percentage of the entire amount of the deposit. It is, however, important to keep in mind that the percentage of the added fee may be different in each bank and it would be beneficial to check the various terms and conditions of depositing in advance.

When to consider opening a deposit? Actually, whenever there is free cash collecting dust in your bank account. It is a good idea to make your money work in your favour and fixed-term deposits are simply one of the easiest and safest means for earning an additional income with your money.