How does a Time Deposit work?

What if you have an extra ₱10,000 on your hands right now? Where do you plan to use that money? Perhaps you will be tempted to go shopping for your family back home. However, if you have to be financially wiser, you will invest your extra money to make it grow eventually. The big question now is where to invest it.

Though the stock market is a good option due to its higher return, the risk of losing your money is as high as well. If you’re more of a conservative type of investor, then you might consider to open a time deposit account.

Time deposit accounts is a type of bank account that allows you to earn fixed interest rate over a fixed period. Typically, the higher the amount, the higher the interest rate, which also means higher interest earned. Unlike your regular savings accounts, you cannot withdraw the amount anytime, unless you are willing to pay for pre-termination fees.

You may ask is it worth it? How much can you earn in this type of investment? What is the preferred term for time deposit?

What is Time Deposit Account?

A time deposit or also called a fixed deposit or term deposit is a type of bank account that earns a fixed interest rate but cannot be withdrawn for a set period of time.

Although time deposits is a deposit account in the Philippines, it differs from a conventional savings account and checking account in terms of net interest margin or earning potential.

There are three factors to consider when determining whether or not to open a time deposit account:

1. Interest rate - This indicates your earnings when you deposit money in a bank for a set period of time. Interest rates change depending on the bank, maturity date, holding duration, and initial deposit.

2. Holding period - This is the amount of time you allow the bank or credit union to hold your money until its matures.

3. Deposit amount - This indicates the amount of money you opted to be deposited to your time deposit account. Take note that since there is a holding period for this type of bank account, you must ensure that the amount won't affect your cashflow, emergency funds, or household budget.

How Time Deposit Accounts Work?

A time deposit in the Philippines permits you to trust the bank with your money for an extended period of time. Your money will then be lent to other customers at a greater interest rate by the bank. In exchange, the bank repays you with earned interest.

For example, if you open a ₱50,000 time deposit in the Philippines for one year at 3% interest, you will earn around ₱1,500 over the course of the year. After your time deposit matures, your total balance in the bank will be around ₱51,500.

Meanwhile, the bank lends your ₱50,000 to other clients at a monthly interest rate of 5%. The bank then makes approximately ₱2,500 every month, for a total of ₱30,000 annual profit.

The net interest margin is the remainder between what the bank yields and pays you for time deposit interest. This profitability statistic rewards banks for the risks they assume while issuing money to borrowers and securing your money.

The Benefits of Investing in a Time Deposit Account

Before putting your money in a time deposit account and allowing the bank to hold it in for a while, learn about its perks to get the most out of it.

1. You can invest for as little as ₱1,000

The minimum amount required to open a time deposit in the Philippines ranges from ₱1,000 to ₱100,000, depending on the bank and the product offered.

The top banks where you can open time deposits at a minimal amount are AUB, PBCom, and Landbank. These banks allow an initial minimum deposit of only ₱1,000.

To obtain the highest interest rates for time deposits, you must have longer terms and require higher minimum placements. In particular, we can say that Security Bank offers the the highest minimum placement and the longest-term option for a time deposit. This bank requires a minimum placement for a peso time deposit of ₱100,000, with the longest-term option of 7 years and competitive rates ranging from 2.92% to 4.19%.

2. Time deposits are a stable and secure investment option

Time deposits are less risky than other forms of investment. They guarantee a return on investment, unlike stocks and real estate.

Simply put, there is no risk of your money being lost in a time deposit. As a result, it is ideal for cautious, conservative investors wanting to grow their money but have a low risk tolerance.

A time deposit is also excellent for capital preservation, particularly for seniors who cannot afford to lose their pension or retirement fund.

3. Interest rates are higher than in traditional savings accounts

The majority of savings accounts pay less than 1% interest. Even high-interest savings accounts in the Philippines only earn slightly more than 1%.

In time deposit, you can earn as much as 5% based on your selected term and deposit amount. In the Philippines, time deposit rates are higher than interest rates of regular savings accounts as funds remain on hold for a fixed period.

4. Fixed and guaranteed interest rates

The interest rate on a time deposit does not change during the lock-in period. Because your interest rate will remain constant, you may calculate how much money your time deposit will earn even if market rates fall after you open your account.

5. With a larger deposit and a longer term, you will earn more

In the Philippines, most banks have tiered time deposit rates that rise as minimum deposits rise and durations lengthen. For example, a ₱50,000 deposit for a five-year term will yield a larger interest rate than a ₱1,000 deposit for only one month.

As a result, the more you invest over time, the better your earnings will become.

6. You may get interest payments

Even if you are unable to withdraw funds from your account, you can still receive interest payments. Banks send out interest on a monthly, quarterly, or annual basis through check or your savings or checking account.

Alternatively, after the period expires, you may receive your interest payment along with your principal or the money you placed.

7. Time deposits in foreign currencies are available

Time deposits in the Philippines are not confined to accounts denominated in Philippine Pesos. Most banks provide time deposits in US dollars. Some, such as BPI and Metrobank, accept multiple foreign currencies, such as the British Pound, Japanese Yen, and Chinese Yuan.

This option is ideal for Filipinos, particularly OFW families, who receive remittances from abroad. You can put the cash directly into your account without the need to convert it first to peso and pay extra foreign exchange fees.

8. It is simple to set up and comprehend

It is as simple as opening a standard savings or checking account. You only need to go to your preferred bank, provide at least one valid ID, and complete out account opening forms.

Instead of a passbook or ATM card, the bank will provide you a certificate of time deposit as proof of deposit. This paper will also include account information like the interest rate, term, and maturity date.

Time deposit accounts are also simple to learn and understand in the Philippines. Unlike stocks, mutual funds, and real estate, which need time and effort to study about, you don't have to learn about an account after you open one.

You simply have to wait until to wait until it your time deposit account matures. Then, you can decide whether to withdraw your funds or reinvest for another period.

9. Time deposits are insured

Time deposit accounts in the Philippines are insured for up to a maximum of ₱500,000 by the Philippine Deposit Insurance Corporation or PDIC. This indicates that you will get back your money if the bank shuts down. This is because the PDIC will settle you deposit insurance.

10. The bank can lend you the money from your time deposit account

Some banks in the Philippines, such as PSBank, have a credit facility of up to 90% of the total deposit amount. Hence, if your time deposit has this offer, the bank can allow you to borrow up to a certain percentage of your total deposit.

The Drawbacks of Investing in a Term Deposit Account

A time deposit account, like any investment, has drawbacks. These are a few examples that you should be aware of.

1. Money are guaranteed for 30 days to 7 years

Time deposits in the Philippines are appropriate for short- to medium-term financial objectives. Because their lock-in or maturity durations can range from one month to five or seven years.

Unlike normal savings and checking accounts, which allow you to withdraw funds at any time, the monies in your account remain with the bank until maturity. You can withdraw your money from a time deposit only after the term or maturity period expires.

You can withdraw funds from your account at any time, depending on your investment horizon.

2. You are not able to make more deposits

Once you've put a particular amount in your time deposit account, you won't be able to make additional deposits like you would in a savings or checking account. If you have extra money to invest, you'll need to start a new account or transfer it to another investing channel.

3. There is a penalty fee for early withdrawal of a deposit

In the event of an emergency, the bank will allow you to make an early time deposit withdrawal. But, if you withdraw before the maturity date, you will be charged a pre-termination penalty, which is typically 10% to 50% of the income collected. Other banks, meanwhile, revert to the bank's regular savings rate, which is lower than the time deposit rate.

4. You will not have easily accessible cash for emergencies.

Placing money in a time deposit account limits the amount of cash available for emergencies. This implies you must set aside a separate amount for immediate necessities in order to avoid forfeiting your deposit and paying fines.

5. There is no possibility of earning more during the lock-in period.

Time deposits have fixed interest rates from the time the account is opened until it matures. These rates are unaffected by market conditions and will not allow you to earn more if the market improves. You're stuck with your cheaper interest rate.

6. Earnings are subject to taxation

Is a time deposit taxed? Indeed, time deposit accounts are subject to government-mandated taxes in the Philippines (except for accounts with a term of five years or longer). The amount being deducted from the interest earnings of your time deposit are: 20% final withholding tax and documentary stamp tax (₱1.50 per ₱200).

Nevertheless, most banks don’t charge any upfront or recurrent service fees on their time deposit portfolio of products. 

If you are a conservative type of investor, you may opt to open a time deposit account after learning its pros and cons in this article. However, many wise investors will certainly advise you to take advantage of the real estate domain as well. Recent studies have shown that the real estate industry will continuously thrive on the coming years and the value of house and lot in the Philippines will certainly appreciate. If you'll be interested to make a real estate investment, Lumina Homes will definitely be your strong partner. We cater well-built yet affordable house and lot that every Filipino family can afford. Feel free to contact our accredited sellers to learn our affordable house and lot for sale in your area.