You will be able to estimate what you lose by withdrawing a fixed deposit before maturity.
Six months into a twelve-month fixed deposit, Farah's landlord tells her he is selling the flat. She needs a deposit for a new rental, and most of her spare cash is in that fixed deposit. She calls the bank expecting to lose a little interest. The answer is worse: under that bank's terms, a deposit broken early earns no interest at all, and she cannot take out only the part she needs.
Breaking a fixed deposit is allowed. It is rarely cheap. This lesson shows you how to estimate the cost before it happens, and how to set things up so it hurts less.
When you place a fixed deposit, you agree to leave the money for the full term. If you take it out early, the bank applies its premature withdrawal terms, which are in the product's terms and conditions. They vary between banks, but three patterns are common.
Some banks pay no interest at all on a deposit broken before maturity. Some pay interest at a much lower rate for the time the money was held, often their savings or board rate. And some charge a fee as well as cutting the interest, so in a bad case you could get back less than you put in.
Whichever applies, the promotional rate that drew you to the deposit is almost always lost. The rate was a reward for leaving the money in place, and breaking early cancels the deal.
Use a made-up example. Farah placed S$30,000 for twelve months at 3.0% a year. Held to maturity, it would have paid S$900. Six months in, she has earned half of that on paper, S$450, but she will not see it unless the deposit runs to the end.
If her bank pays nothing on early withdrawal, she gets back S$30,000 and gives up the S$450 she had earned so far, plus the S$450 she would have earned in the next six months.
If instead her bank paid a made-up 0.05% a year for the time the money was held, she would receive S$30,000 plus about S$7.50 for the six months. Better than nothing, but still almost all of the interest gone.
If the bank also charged a fee, she would subtract that too. The terms will tell you which case applies. Read them before you place the deposit, not on the day you need the money.
Many fixed deposits do not allow you to take out part of the money. If you need S$5,000 from a S$30,000 deposit, you may have to break the whole S$30,000, losing interest on all of it to reach a sixth of it.
Some banks do allow partial withdrawals, often in set multiples, with the rest of the deposit carrying on. Check the terms for your product, and treat "no partial withdrawal" as the default unless they say otherwise.
Once you know the rules, there is a simple way to protect yourself. Instead of one large deposit, place several smaller ones.
Go back to Farah's S$30,000. Suppose she had placed it as three separate S$10,000 deposits for twelve months, all at the same made-up 3.0%. When the landlord called, she could have broken just one of them. She would lose the interest on that S$10,000, which is S$150 earned so far and S$150 to come. The other two deposits would carry on to maturity and pay their full S$600 between them. Breaking one of three costs a third of what breaking the whole sum costs.
Many promotions have a minimum placement, which limits how small you can split. Within that limit, a few deposits of different sizes give you more choice than one big one. You can also stagger the maturity dates so that one deposit is always coming due within a few months, which is the start of the ladder idea in module 8.
If you genuinely do not know when you might need the money, a fixed deposit's lock-in is working against you. That is where the SSB from module 3 is worth a look. Lesson 3.3, Getting your money back early, and what it costs you, showed that you can redeem an SSB in any month and get back your full face value plus interest earned so far, with no capital loss and only the higher step-up rates given up and any transaction fee.
The trade-offs are that an SSB redemption takes until the following month, and the first-year SSB rate may be below a good fixed deposit promotion. If you are fairly sure of your date, the deposit may pay more. If you are not, the SSB's flexibility can be worth more than the extra interest.
Farah now keeps her rent and emergency money out of long fixed deposits altogether. Take one bank's fixed deposit and find its early withdrawal terms, so you know what breaking one would cost before it ever happens to you.
Find the early withdrawal terms for one bank's fixed deposit and write what you would receive if you broke a made-up S$20,000 deposit halfway.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).