by Venus Zoleta, on category "Personal Finance"
August 6, 2019
Are time deposits a good investment option? Cliche as it may sound, but the answer is “It depends.”
It depends on your financial goals, as well as the bank where you’ll open a time deposit account. Several other considerations may also affect your decision whether to go for it or invest elsewhere.
Making a smart investment decision starts with knowing and understanding what you’ll be getting into. Of course, you want to grow your money—not lose it.
Here’s everything you need to know about time deposits in the Philippines.
A time deposit (also known as term deposit or fixed deposit) is a type of bank account that earns a fixed interest but cannot be withdrawn over a specified term or period.
Although time deposits are deposit accounts like regular savings and checking accounts, these bank products differ from one another, especially in terms of earning interest.
The required minimum amount to open time deposits in the Philippines ranges from PHP 1,000 to PHP 100,000, depending on the bank and the specific time deposit product it offers.
Time deposits in AUB, BDO, and LANDBANK are the cheapest to open, with their minimum placement of PHP 1,000.
Time deposit products in other banks with higher interest rates and longer terms require higher minimum placements. For example, Security Bank has the highest required minimum placement for a Peso time deposit at PHP 100,000, but it also has the longest term option of seven years and competitive rates ranging from 3.50% to 4.60%.
Time deposits are suitable for short-term to medium-term financial goals, as their lock-in or maturity periods can be as short as one month to as long as five or seven years.
Depositors can choose to have their money held (and keep earning interest) by the bank for a fixed term of 30 days, 12 months, five years, or whatever holding period is available for a particular time deposit product.
This means your funds in a time deposit account remain with the bank during the entire duration of its maturity period, unlike with regular savings and checking accounts that can be withdrawn at any time. With a time deposit, you can access your money only when its term or maturity period ends.
Depending on your investment horizon, you have the option to either withdraw your funds upon your time deposit account’s maturity or let it continue earning interest for another term, which can be shorter or longer than the original term.
Time deposits have a lower risk than other types of investment. Unlike stocks and real estate, they guarantee a return on your investment (plus any interest earnings).
Simply put, there’s no danger of losing your money in a time deposit.
This makes time deposits perfect for conservative investors who want to grow their money but have a low tolerance for risk. These financial products are also ideal for capital preservation, especially for senior citizens who can’t afford to lose their pension or retirement fund.
Most savings accounts yield only less than 1% interest. Even the so-called high-interest savings accounts in the Philippines earn just a little over 1%.
In contrast, time deposits can earn as high as 5%, depending on the term and deposit amount.
Time deposit rates in the Philippines are higher than interest rates of traditional savings accounts because funds remain on hold for a pre-specified period. During this time, banks can use the funds to re-invest or lend them for higher profits.
A time deposit’s interest rate doesn’t change throughout the lock-in period.
Fixed time deposit rates in the Philippines have their pros and cons.
Because your rate will remain the same, you can compute how much interest your time deposit will earn, even if market rates begin to drop after you’ve opened your account.
However, fixed rates are disadvantageous when market interest rates increase. You’ll be stuck on your time deposit’s lower rate.
Banks in the Philippines have tiered time deposit rates, which increase as the minimum placements go higher and the terms are longer. For example, you’ll get a higher interest rate with a PHP 50,000 deposit for a five-year term than a lower deposit of PHP 1,000 for only one month.
Thus, the larger the amount you invest for a longer period, the higher your earnings will become.
Even though you can’t withdraw the amount you placed in your time deposit account while it’s locked in, you’ll still be able to receive your interest payments. The interest payouts can be released every month, quarter, or year through a check or credited to your specified savings or checking account.
Alternatively, you may opt to receive your interest payment along with your principal (the amount you deposited) when the time deposit’s term ends.
Time deposits are not just limited to Philippine Peso accounts. Most banks offer time deposit products in US Dollar. A few ones like BPI and Metrobank have time deposits in a wide variety of foreign currencies, including Chinese Yuan, Japanese Yen, and British Pound.
This is a great option for Filipinos, especially OFW families, who receive overseas remittances. You can place the amount straight to your time deposit account without having to convert it to peso and paying foreign exchange fees.
Opening a time deposit account is as easy as that of a regular savings or checking account. You just need to visit the nearest bank branch, present at least one valid ID, and fill out account opening forms.
However, instead of an ATM card or passbook, the bank issues a certificate of time deposit that serves as a proof of deposit. This document also shows the account details such as the term, interest rate, and maturity date.
Time deposits are easy to learn and understand, too. Once you’ve opened an account, you won’t have to spend time learning about it, unlike with stocks, real estate, and mutual funds that require time and effort in analyzing market trends. You just have to wait until your time deposit matures and decide whether you’ll want to withdraw your funds or invest it again for another period.
Most banks don’t charge any upfront or ongoing service fees on their time deposit products.
However, time deposits aren’t exempt from government-required taxes (except for accounts with a term of five years or longer). A 20% final withholding tax and a documentary stamp tax (PHP 1.50 per PHP 200) are deducted from the interest earnings.
If any emergency comes up, the bank will allow you to make an early withdrawal from your time deposit account. But withdrawing before the maturity date has a consequence: you’ll be charged a pre-termination penalty, which is a percentage (usually 10% to 50%) of the interest earned. Other time deposits have an early withdrawal penalty in the form of reverting to the bank’s regular savings rate that’s lower than the time deposit rate.
Time deposits are insured up to PHP 500,000 by the Philippine Deposit Insurance Corporation (PDIC). This means you’ll get your money back in case the bank closes down, as the PDIC will pay you deposit insurance.
Once you’ve deposited a certain amount in your time deposit account, you can’t place extra deposits as you would with a savings or checking account. If you have extra money that you want to invest, you’ll have to open a new time deposit account or put it in another investment channel.
Time deposits in some banks like PSBank have a credit facility of up to 90% of the total deposit amount. If your time deposit has this feature, it means you can borrow up to a certain percentage of your total placement.
Educating yourself about time deposits—or any savings/investment products—is the key to making a sound financial decision.
A time deposit is a good option if you’re looking for a tool that’s more than just for safekeeping your money. But if it isn’t aligned with your financial goals, explore other higher-yielding investment methods such as stocks, mutual funds, and UITF as your alternatives.
While you’re at it, check out these Moneymax guides to various investment options in the Philippines: