To most Malaysians, fixed deposit remains one of the best conservative means to save your money due to its guaranteed returns, higher interest rates (compared to conventional savings accounts) and protection by the free bank deposit insurance known as PIDM.
But what happens if you're forced to withdraw the money you've put into a fixed deposit account before it expires? Would you lose all your interest? Or worse still, would you end up paying a penalty in addition to losing your interest?
In this article, we'll show you the consequences when you opt to withdraw from a conventional fixed deposit account before it expires, based on policies adopted by major banks in Malaysia.
1) For Fixed Deposit Accounts of 1 - 3 Months
For fixed deposit accounts with terms of one month, two month or three month, a premature withdrawal would see you instantly losing all interests you have generated with your deposits. Even if you opt to make an early withdrawal one day before the maturity date, you still wouldn't earn a single sen in interest.
2) For Fixed Deposit Accounts of More Than 3 Months
For fixed deposits with terms of more than three months, two things may happen:
- If you opt to initiate a premature withdrawal any time during the first three months, you lose all interests generated;
- If you opt to initiate a premature withdrawal AFTER three months, you will still earn interests but only at half of the interest rate you were offered. In another word, 50% of the interest you've earned is retained by the bank as charges for early withdrawal.
Say you put RM100,000 into a one-year fixed deposit account at the rate of RM3% p.a., but decide to withdrawal the money after the 120th day.
Your interest = (1/2 3%) RM100,000 (120 / 365) = ~ RM493
If you did not execute the early withdrawal, the interest you would have generated over the same period = 3% RM100,000 (120/365) = ~ RM986
What It Means to the Common Fixed Deposit Users
So what does the above mean for the common fixed deposit users? For a start, it means you'll need to engage in some form of planning before you commit your funds to a fixed deposit account. If the amount involved is a sizable sum, an early withdrawal could result in you losing thousands or even tens of thousands of interest! A good approach for fixed deposit is to anticipate any large expenditure you might need to pay off in the foreseeable future, then commit your fixed deposit period accordingly.
Remember: conventional fixed deposit accounts DO NOT have "fixed" terms. If you like, you could always set the account to mature on the 7th month, or the 8th, or the 13th.
The important thing is that it should mature at roughly the same time when you need the funds the most.