The main attraction of a term deposit is its fixed interest rate. Opening a term deposit in a bank or credit union allows you to lock in an interest rate that remains the same throughout the term deposit's complete term, which can be months or years.

Standard term deposits focus on locking in that interest rate for the term. However, bump-up and step-up term deposits are a new option in which the interest rate increases over time, following the changes in the market.

What are Bump-Up and Step-Up Term Deposits?

Bump-up and step-up term deposits allow for increases in the interest rate during the term. Bump-up term deposits allow you to choose when you get a boost, while the bank or credit union chooses the increase in advance for a step-up term deposit.

Bump-up Term Deposits

Unlike a traditional term deposit’s fixed interest rate, a bump-up term deposit will allow a one-time increase in the interest rate, which will lock in until the maturity period ends. A term deposit with a more extended maturity period, like four years, may allow a second increase in its interest rate.

Bump-up term deposits require the deposit holder to request the rate adjustment. For instance, a bank or credit union can offer a term deposit with a 24-month term and one bump-up option. For example, if the current interest rate is 2 percent and will increase to 2.9 percent in seven months. The seventh month will allow you to bump your interest rate to 2.9 percent to get increased returns for the remaining 17 months.

Whenever the rates decline again, you'll be able to enjoy the higher interest rate throughout the remainder of the maturity period.

Step-up Term Deposits

Step-up term deposits have interest rates that increase in phases over the maturity period. For example, your term deposit can have an interest rate of 0.5 percent and have a schedule to increase it by 0.1 percent every six months for four years. That way, you'll have a term deposit with a 1.1 percent rate by the end of its maturity period.

Advantages and Disadvantages of Bump-Up Term Deposits

Advantages of Bump-up Term Deposits:

• Taking advantage of rising rates: Bump-up term deposits are a great option when you expect rates to rise. You can purchase a bump-up term deposit and choose an increase at a later date whenever the interest rates rise to get a better return.
• Flexibility in rates: An increase in interest rate is allowed only once or twice during the maturity period. The rate adjustment request must come from the deposit holder.
• Secure investment: Bump-up term deposits purchased through federally insured banks and credit unions are protected by up to $250,000 by the FDIC and NCUA, respectively.
• Guaranteed rates: The rates on bump-up term deposits are more competitive than step-up term deposits.
• Availability: Although less common than traditional term deposits, banks offer bump-up options more often when compared to step-up term deposits.

Disadvantages of Bump-up Term Deposits:

• Intervention required: Customers must choose the best time to request the rate adjustment to maximize their term deposit’s growth.
• Lower starting rates: Bump-up term deposits typically have a lower interest rate than traditional or variable-rate term deposits.
• Limited terms: Bump-up term deposits are usually available with limited-term options.
• Lower rates: Bump-up term deposits offer less competitive rates compared to traditional term deposits.

Advantages and Disadvantages of Step-Up Term Deposits

Advantages of Step-up Term Deposits:

• Secured investment: Step-up term deposits, when purchased through credit unions and banks that are federally insured, are secured up to $250,000.
• Guaranteed rates: Step-up term deposits typically offer better fixed-rate growth when compared to other money market accounts with variable rates.
• Flexibility in rates: With a step-up term deposit, the rate increase is on a predetermined schedule. The schedule helps you compare the returns with those offered in a traditional term deposit so you can choose the one with the most growth potential.

Disadvantages of Step-up Term Deposits:

• Limited terms: Step-up term deposits usually have limited-term options.
• Scarcity: Banks and credit unions typically do not offer step-up term deposits.
• Low rates: Step-up term deposits usually do not have a competitive rate compared to blended or other types of term deposits.

Takeaway

In a growing market, a traditional term deposit with a fixed interest will make you lose out on any potential increase in interest rates. In contrast, getting a bump-up or step-up term deposit will allow you to increase your interest rate and get better returns after the maturity period.