Alternatives to term deposits in 2026, ranked by risk

The main alternatives to term deposits, from lowest to highest risk, are government bonds, corporate bonds, listed hybrids, pooled mortgage and private credit funds, direct co-funded secured loans, and shares. Each rung pays more than a term deposit’s 5.3% to 5.5% p.a., but asks you to give up something: price stability, liquidity, government backing or control.

This guide sets out that ladder honestly, with rates as at September 2026. It is written by HomeSec Business Finance, an Australian private lender founded in 2004 that invites wholesale investors to co-fund some of its secured loans. We have a view, but we will show you the trade-offs on every rung, including our own.

What do term deposits pay as at September 2026?

A term deposit is money lent to a bank for a fixed period at a fixed rate. As at September 2026, the highest 12-month term deposits pay about 5.3% to 5.5% p.a., while the big four banks pay 4.75% to 5.25% p.a. The RBA cash rate is 4.35% after three rises in 2026.

The appeal is obvious. The rate is fixed, the capital does not move in price, and the Financial Claims Scheme covers deposits up to $250,000 per account holder per ADI. That backing is what you give up on every rung above.

The weakness is just as clear. After tax and inflation, a term deposit often leaves little real return. And for a large balance, the $250,000 cap means spreading money across several banks to stay covered.

How do the alternatives rank by risk?

The ladder below runs from lowest to highest risk. It is a rough guide: the risks differ in kind, not only in size.

Long-run figures are from Vanguard’s index chart for the 30 years to 30 June 2026 and include both income and growth.

Are government and corporate bonds better than term deposits?

A bond is a loan to a government or company that pays a set coupon and returns your capital at maturity. Commonwealth bonds are backed by the Australian Government, which makes them the closest thing to a term deposit without the $250,000 cap.

The trade-off is price. If interest rates rise after you buy, the market value of your bond falls. Hold it to maturity and you get your capital back; sell early and you may take a loss. Rates have risen three times in 2026, which shows how real that risk is.

Corporate bonds pay more because you take on the company’s credit risk. Many trade in thin markets, so selling a parcel quickly can mean accepting a lower price. For most private investors, bonds come through an ETF or managed fund rather than directly, which adds fees and removes the certainty of a maturity date.

Honest verdict: a sensible home for part of a portfolio, but not a big step up in income from a term deposit.

What is happening to bank hybrids?

A hybrid is a security that sits between debt and equity. Bank hybrids pay a floating income, but they were designed to absorb losses if a bank gets into trouble, including by converting to shares.

That design is why APRA is removing them. In December 2025 it finalised changes to phase out Additional Tier 1 capital, taking effect on 1 January 2027, and expects all bank AT1 to be phased out by 2032.

For income investors, this is less a risk than a disappearing option. As existing hybrids are called, the money comes back and needs a new home. Many hybrid holders are now looking at the rungs either side.

Honest verdict: not a long-term alternative any more.

Are pooled mortgage and private credit funds a good replacement?

A pooled mortgage fund combines many investors’ money and lends it out as the manager decides. You own units in the fund, not a share of any particular loan.

Returns are often single-digit. As at September 2026, La Trobe’s 12 Month Account pays 6.75% p.a. with a $1 minimum. That is more than a term deposit, but Moneysmart notes these funds are not covered by the Financial Claims Scheme and withdrawals may be restricted or delayed.

That is not theoretical. In August 2026, several Australian credit funds limited or suspended redemptions. And more than half of Australian private credit is real-estate debt, much of it lent to developers.

Honest verdict: a real step up in yield, but you give up both the backing of a deposit and control over what your money is lent against. We compare the two structures in detail in direct mortgage investment vs pooled funds.

How does co-funding a secured loan compare?

Co-funding means lending into a specific, individual loan alongside HomeSec. You are named on the registered mortgage for your exact contribution, and principal and interest are paid straight to your own bank account.

Returns are 12% to 18% p.a. on the loans you choose. Loans run for 1 to 12 months and are short term business loans secured by registered first and second mortgages over Australian real estate, at a maximum 80% LVR on residential property and lower on commercial. HomeSec co-invests its own money in every loan it offers, and does not fund development or construction.

The trade-offs are real, and you should weigh them:

• No Financial Claims Scheme backing. Your protection is the property, the LVR buffer and the loan documents.
• Concentration. One loan means one borrower and one property. Because each loan can take from $100,000, you can spread capital across several loans.
• Timing. A borrower can repay late, and a defaulted loan may need the property sold. HomeSec meets the legal costs of recovery on defaulted loans.
• Eligibility. Co-funding is open to wholesale and sophisticated investors only.

On liquidity, the position is better than a pooled fund’s. There is no pool to freeze. If you need out early, HomeSec will buy out your share and repay your principal. The yield itself comes from speed and short terms, as we explain in where the returns come from.

Honest verdict: the highest secured income on the ladder, for investors who want to choose each loan and can meet the wholesale test.

Should shares and dividends be on the list?

Shares are not a term deposit substitute, but many investors weigh them as one. Australian shares have returned 9.0% p.a. over 30 years, and franked dividends can be tax-effective.

The catch is volatility. Share prices can fall sharply and stay down for years, and dividends are cut when profits fall. If the money has a job to do within one to three years, that risk may be too much. Over a decade or more, shares have rewarded patience.

Honest verdict: the strongest long-run growth on the ladder, and the least predictable income.

How should you choose between them?

Start with three questions:

1. When do you need the money back? If the answer is “on a fixed date within a year”, terms and liquidity matter more than yield. Our guide to short term investments for large balances covers this.
2. What backing do you need? If Financial Claims Scheme cover is essential, stay on the first rung and spread balances across banks.
3. How much control do you want? A pooled fund makes the decisions for you. A co-funded loan lets you see the property, the LVR and the borrower before you commit.

Many investors do not choose one rung. They hold cash for flexibility, some shares for growth, and a sleeve of secured income in between. We walk through how some investors think about that mix in where to invest $1 million in Australia.

Where to from here?

A term deposit is a sound place to start, not always a sound place to stay. If you would like to see what sits on the secured-income rung, including the property, the LVR and the rate on a real loan, register your interest and our Funding Manager will be in touch.