As Filipinos, we have been advised by many to go for Time deposits when it comes to savings mostly because it is a comparatively less risky option for you to invest your money. Not to mention that it is probably been the most preferred financial product of many Filipinos over many generations. So what is it about Time Deposits that has made it the ‘class pet’? And do these reasons still hold good in today’s financial scenario where there are so many alternatives? Here is a quick outline on what to expect if you are thinking about time deposits as the way go:
What are Time Deposits?
Time deposits, put simply, are a financial product that lets you earn interest when you deposit for a fixed term or period. During this period you cannot withdraw from your deposit. The biggest advantage, which keeps people coming back for more, is the higher interest rates that you can earn. The higher the amount you deposit and the longer the term you go for, the higher will be your returns.
Regular savings and checking accounts, on the other hand, will allow you to withdraw from your deposit any time that you need. They are considered demand deposits. Although this may seem convenient, remember that they offer lower rates.
Another major difference is that unlike savings or checking account, you will not get a passbook, ATM card or checkbook. Instead you will be getting a certificate of time deposit which will be the evidence of ownership. This certificate will show the interest rate, term and maturity date.
Typically, the minimum term is 30 days. You can also avail the 60, 90, 180 and 360 days options (or variations of these). Recently certain banks have started offering longer-term time deposits; such as two, three, five, and six year-long terms.
You can deposit in Time deposit in various foreign currencies at most of the bigger banks such as USD, AUD, GBP, CAD, EUR, JPY, CHF etc.
When the Term Ends:
When the term has been completed, you can choose to either withdraw the funds or you could roll over the deposit for another term for a higher interest rate.
Time Deposit Interest rates in Philippines vary depending on the bank that you choose. Tiered rates are offered by most banks for longer terms and higher deposit balances. Which means that the longer the term or the larger your deposit, the higher the interest rate that you will receive.
How is the interest earned?
The interest is credited to the principal deposit when the deposit matures. The interest is calculated from the day you open the account until the day the deposit matures. For some banks, the interest is equal to the documentary stamp tax and final taxes. If you go for a long-term time deposit, there are certain banks which will credit monthly interest income to your savings account.
Withdrawing before the end of the term:
When you go for a time deposit, make sure that you will not be needing to make a withdrawal before the end of the term. However, we all have those financial emergencies from time to time. If you do decide to withdraw from your time deposit account, you will be charged with a pre-termination penalty, which means that you will be receiving a much lower interest rate.
Fees and taxes
There are no fees to be dealt with when it comes to time deposits. There are however government required taxes that will be applicable. One of these are the final tax on the interest earned, which is based on the principal amount, as well as the documentary stamp tax for the certificate.
The documentary stamp tax is P1.00 for every P200.00. Also a 20% final tax will be deducted from your interest income. However, if you go for a term of more than five years, then you will be exempt from paying tax.
Different banks have different requirements for minimum deposits. There are certain banks that need you to deposit a minimum deposit of just P1,000. Certain banks, on the other hand, require a minimum deposit of at least P100,000, particularly those with longer terms and higher rates.
Are time deposits insured?
Yes, the Philippine Deposit Insurance Corporation (PDIC) insures time deposits for a sum of up to P500,000.
Borrowing against Time Deposit
It is possible to borrow up to 90% against your time deposit at some banks.
Comparing Time Deposits and Investment Funds
The main competition of Time Deposits are investment funds like mutual funds, unit investment trust funds (UITFs) and variable unit-linked linked insurance products. Investing in mutual funds means that you are investing in companies. This is not a traditional bank product. UITFs are managed by the trust groups of banks. It involves various investors and thus a premium fund certificate.
Putting your money in time deposit may not earn you as much as it would if you went for these two options (except for money market funds), but time deposits are insured by the PDIC for a sum of up to P500,000. Also, it is a safer bet since the interest rate is fixed and guaranteed.
Are time deposits right for you?
You must first think what your financial goal is when you consider a time deposit. If you are thinking ahead, for example, your retirement, or if you just had a baby and are thinking of the child’s future, then a less risky investment such as long-term time deposit (of five years or more) would be an ideal fit. This way you will be receiving a higher, fixed interest rate that is compounded on a monthly basis. Also it is tax free as well as documentary stamp tax free. However, try to look ahead when you go for a longer term since it will cost you if you have a financial need before the term matures and need to make a withdrawal.
If your needs are more short term, a regular time deposit is a good option when compared to regular savings or interest-bearing checking accounts because the interest is higher.