Fixed-term deposit – predictable investment with high security

A fixed-term deposit is a safe form of investment that can generate good interest. It is offered by almost all German and many foreign banks. However, you should only invest in a fixed-term deposit if the money is not needed for an extended period. It is also very important to compare multiple offers and only then make a decision. Below we explain in more detail what a fixed-term deposit account is and what you should consider as an interested investor.

Fixed-term deposit conditions – a brief overview

The term of a fixed-term deposit varies. Short-term investments of 30 days are possible, as are long-term terms of up to 10 years. During this period, the money is not available to the customer. If the fixed-term deposit is terminated early, the contractually guaranteed interest is lost. For this reason, the fixed-term deposit is not suitable as an emergency fund but as a secure and solid capital investment. Interest rates on fixed-term deposits are generally significantly higher than those paid on a savings book. However, the money in a savings book is available daily. The principle is that the interest for a fixed-term deposit account is higher the longer the money is invested. The investment amount also plays a role. Smaller amounts generate less interest than larger amounts. A decisive advantage of fixed-term deposits is that the interest rate is fixed and guaranteed at contract signing. Interest rate fluctuations on the capital market are irrelevant for fixed-term deposits. Interest credits can be made annually, quarterly, or monthly. Details are contractually agreed between the customer and the bank.

Characteristics of a fixed-term deposit account – the details

Let us now take a more detailed look at the characteristics of a fixed-term deposit account. Like any form of investment, fixed-term deposits have specific features that may make them particularly attractive or rather uninteresting for you as an investor.

Higher interest than other interest-bearing deposits

Interest-bearing deposits such as overnight money (Tagesgeld), fixed-term deposits, or a savings book have long been considered a basic form of investment in Germany. For this reason, you should always compare the interest rates of a fixed-term deposit account with other interest-bearing deposits. In this context, it can be noted that fixed-term deposits clearly lead in terms of return. In low-interest phases, rates may be in the range of 0.5 to 2.2%, while in high-interest phases investors can sometimes earn 5–6% per year. An overnight money account rarely exceeds returns of 1.0% per year in low-interest phases and reaches at most 3–4.5% per year in high-interest phases.

High degree of predictability

One of the most important aspects of a fixed-term deposit is that all crucial parameters can be determined in advance. As an investor you agree the following points with the bank:

• Term (often between a few months and 10 years)
• Interest rate (depending on the bank)
• Investment amount

Thus you already know in advance how long you will have to do without your capital and what return it will bring you year after year. Predictability is a major advantage because you as an investor need not fear interest rate fluctuations. Your money will generate the same interest income over the entire term – regardless of market developments. This is particularly interesting if you plan to rely on the interest as a regular income in the future (e.g., in retirement as additional pension).

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Deposit insurance – the cornerstone of security for fixed-term deposits

As an investor, you are normally concerned about the safety of your invested money. Here fixed-term deposits can offer another advantage because, as an interest-bearing deposit, the money is covered by deposit insurance. In the event of a bank insolvency, you as a saver would be compensated. But how does deposit insurance for fixed-term deposits work in practice?

Statutory deposit insurance as a base

Statutory deposit insurance now applies throughout the EU. As long as you as a saver use a fixed-term deposit account of a bank in the EU, you can rely on statutory deposit insurance. This insures deposits up to an amount of €100,000 per customer. If the bank in question becomes insolvent, you will receive your invested savings from the relevant compensation scheme (depending on the country in which the bank is domiciled) up to €100,000 (€200,000 for married couples who save jointly). Capital above that amount is not covered by statutory deposit insurance and would be lost in such cases.

Voluntary deposit insurance schemes as an additional supplement

In addition to statutory deposit insurance, other protection schemes have existed in Germany for a very long time. This way, deposits over €100,000 are often protected. Voluntary deposit insurance differs depending on the type of bank and also operates in different ways:

1. Private banks with a branch or headquarters in Germany

Private banks in Germany are in many cases members of the Deposit Protection Fund of the Association of German Banks (Bundesverband deutscher Banken e.V.). This deposit protection fund ensures that customer funds are protected by an amount equal to 20% of the liable own funds. Since a bank has a minimum capital of €5 million, the minimum protection per investor would already be €1 million. However, equity capital often amounts to much higher sums, so deposit protection for fixed-term deposits can be correspondingly high.

Important: Not every bank in Germany and certainly not every foreign bank is a member of the Deposit Protection Fund of the Association of German Banks. Therefore you as an investor should definitely check in advance how high the deposit protection would be in the worst case and whether voluntary deposit insurance schemes exist in addition to statutory deposit insurance.

1. Savings banks as well as Volks- and Raiffeisenbanken

   

The savings banks and cooperative banks in Germany each have their own additional protection systems that go beyond statutory deposit insurance for interest-bearing deposits such as fixed-term deposits, overnight money, savings books, and also cash deposits. In this case, however, the so-called institutional protection (Institutsschutz) comes into play. This is therefore not about providing you as an investor with a specific additional protection amount.

Rather, savings banks and cooperative banks try to ensure among themselves that an institution in financial trouble does not have to file for insolvency. The individual institutions support each other so that payment obligations to customers and investors can be met at all times.

Public-sector banks in Germany also offer additional deposit protection schemes. Although you as a saver rarely open a fixed-term deposit account with a public bank, this would still be possible.

Severely limited availability of capital

Fixed-term deposits have several invaluable advantages for investors, but there are of course disadvantages on the other side. The biggest is the lack of availability of capital during the term. If you invest a certain amount in a fixed-term deposit account, it is not available to you for the entire term. Early termination is virtually impossible and may only occur for compelling reasons. In such cases you often have to accept substantial losses on interest. In practice, therefore, it can be assumed that the money invested in a fixed-term deposit account simply cannot be used for the agreed term. For this reason you should carefully consider in advance how long you can do without the investment amount.

Tip: Nowadays combo products of fixed-term deposit and overnight money are also offered. This form of investment, called flex-money, initially works like a fixed-term deposit account. However, if you need the capital in the meantime, it automatically converts to an overnight money account with lower interest. Flex-money can make it easier for you as an investor to choose a longer term. In an emergency you could still access your capital.

Which aspects should I consider when opening a fixed-term deposit account?

A fixed-term deposit account can be a good addition to your investment portfolio. This way you hedge and secure a return that you can already count on today. But which aspects should you actually consider when opening a fixed-term deposit account? Which decision criteria are particularly important?

The level of fixed-term deposit interest rates

You invest money in a fixed-term deposit account to achieve a certain return. For this reason, interest rates are naturally the most important decision factor when choosing your fixed-term deposit account. There are now differences between providers, so you should definitely perform a rate comparison beforehand. Even if the differences in rates do not seem large at first glance, they can make a significant difference for larger investment amounts and longer terms. Our following example with an investment amount of €80,000 and a term of 8 years illustrates this more precisely:\

Table 1: Example calculation of the effects of interest rate differences on fixed-term deposits

As you can quickly see, the return on fixed-term deposit account I after 8 years is over €4,400 higher than for fixed-term deposit account II. This clearly shows that comparing interest rates is extremely important even for fixed-term deposits.

Minimum deposit – a real hurdle for small investors

Fixed-term deposit accounts were once notorious for requiring a high investment amount. This so-called minimum deposit sets the lower limit for the investment amount. Even today there are many banks that have set minimum deposits of €2,000 to €5,000. Fortunately, there are also offers without a minimum deposit or with a symbolic minimum of €1. If you want to open a fixed-term deposit account, you should first check your investment amount. When comparing providers, you can then conveniently narrow your choice to banks for which your investment amount is not too small.

The investment term – a balancing act for you as an investor

If you are interested in a fixed-term deposit account, the desired investment term is also important. There are three main reasons for this:

1. Banks do not always offer all terms

Fixed-term deposit providers do not by far all offer the full spectrum of terms. This is especially true for terms under 12 months and over 5 years. If you want to invest particularly long-term, be aware that the number of providers in this segment is somewhat limited.

1. You cannot access the capital during the term

As described above, fixed-term deposits are secure but somewhat inflexible investments. You cannot access the invested amounts during the entire term and early termination of a fixed-term deposit account is virtually impossible. Therefore, on the one hand only invest as much money in a fixed-term deposit as you can do without. On the other hand, perform a small financial check for the future and consider how long you can do without your invested capital. This helps prevent unpleasant surprises later on when you need capital but cannot access it.

1. The length of the term often affects the interest rate

   

Another effect of the investment term is that it influences the level of interest. Many banks offer somewhat better conditions for long terms. This is due to the long planning security the bank obtains from a fixed-term deposit with a term of 6–10 years. If you invest fixed-term deposits for the long term, you could therefore earn a slightly higher return.

On the other hand, as an investor you are then also decoupled from market developments for a very long time. If fixed-term deposit rates generally rise in the meantime, you can only benefit from that much later with a long term.

For the reasons listed here, choosing the term is always a balancing act. There are various aspects and influences to consider that can affect your return. Flex-money could also be considered as an alternative to be more flexible.

Deposit insurance – vital for your capital

As already mentioned, the rules on deposit insurance are by no means uniform. Therefore you should check carefully which deposit insurance the respective provider offers before opening a fixed-term deposit account. The following questions are important:

1. Is the bank an EU-based provider?

Banks headquartered within the EU are automatically subject to statutory deposit insurance. Thus your deposits would be insured up to €100,000. This does not apply to banks headquartered outside the EU. They are subject to the protection rules of their countries, which are often weaker. A closer look is therefore important.

1. Is there additional voluntary deposit insurance?

   

If you want to invest more than €100,000, the question of additional voluntary deposit insurance is also very important. Banks headquartered in Germany or savings/cooperative banks in Germany often have corresponding protection systems. Meanwhile some foreign banks are also members of the Deposit Protection Fund of the Association of German Banks. A closer look is therefore essential for large investment amounts to avoid losing money in the event of insolvency.

Type of interest payment – compound interest effect or not?

The type of interest payment is also an important point for fixed-term deposits. This concerns whether banks pay out interest every year or credit it to the fixed-term deposit account and reinvest it. You should ask yourself whether you need the interest immediately or prefer to further increase your return. Reinvesting interest generates a compound interest effect, which can be quite attractive for larger sums. We use the above example again with an interest rate of 2.2% per year:\

Table 2: Example calculation of the compound interest effect

The compound interest effect in this example would therefore bring in more than €1,000 over 8 years. However, it should be noted that it is significantly smaller for short terms or smaller investment amounts. In addition, if interest is reinvested over the entire term you will receive no payout from your fixed-term deposit account.

Who benefits from a fixed-term deposit account?

A fixed-term deposit account is attractive when you want a predictable return with high security. For these advantages you should be willing to forgo higher returns because, compared to other forms of investment such as stocks, ETFs, or real estate, potential gains from fixed-term deposits are considerably lower—especially in low-interest phases. For this reason it makes more sense to use a fixed-term deposit account as a complement to other investments. This way you hedge somewhat riskier investments and at least partially know what returns you can count on in the future.

A fixed-term deposit is particularly suitable in the following situations:

• Complementing and hedging your own investment mix
• Achieving a predictable return for a future investment or purchase
• As a small investor, safely investing profits (e.g., dividends) from other investments

  

What alternatives are there to fixed-term deposits?

A fixed-term deposit can be an interesting addition to your investment portfolio. Still, the question arises which alternatives exist. The market for investments is very large and there are countless possibilities. But if you choose fixed-term deposits, you want a certain degree of security and do not want to worry daily about a total loss. For this reason, alternatives are primarily other safe investments or those with manageable risks. Here is a small overview with brief descriptions:

1. Overnight money (Tagesgeld) and savings book

   

If you want security regarding your capital but flexible access to your money, an overnight money account is the right choice. Although the return is lower than with fixed-term deposits, you can use the money on an overnight money account at any time. The savings book, once the favorite of German savers, is less attractive because it offers lower returns than overnight money and is also more restricted in flexibility.

1. ETFs (Exchange-traded funds)

   

Exchange-traded index funds (ETFs) have become a true mass market product. This is because you can invest in stocks in a relatively safe way. An ETF replicates the performance of a particular stock index (e.g., DAX, Dow Jones, EURO STOXX 50). This kind of diversification ensures that losses on individual stocks do not weigh heavily. Moreover, returns depending on the ETF and underlying index are significantly higher than fixed-term deposits. ETFs can also be used as savings plans to build wealth.

1. Real estate

   

Investing in real estate is much larger in scope and more complex than the other alternatives, but it can still be worthwhile. If you have saved €50,000 or more, you can acquire a property with a bank loan and have the rent cover the loan installments. With a clever choice of property and a favorable financing provider, you can even generate positive cash flow. Our MAXDA experts are happy to assist you with mortgage financing. Together we will find the most affordable mortgage that suits you.

Fixed-term deposit as an interesting complement

The advantages of a fixed-term deposit outweigh the disadvantages. Even in uncertain times the money is safe and the interest rates are above average for interest-bearing deposits. The only disadvantage may be that the customer cannot access the fixed-term deposit if the investment period has not yet expired. Furthermore, interest-bearing deposits are generally not considered the pinnacle of returns.

When choosing a fixed-term deposit account, you should look closely and consider various factors. A provider comparison helps you find the optimal return for your desired term and investment amount. It is also essential to check the deposit insurance if you want to avoid losing your money in the event of a bank insolvency. Taking these aspects into account, fixed-term deposits can be described as a convenient and simple investment that also achieves a solid return.