[Get 1% More Interest, Pay Less] "Don't Save, Pay Off Debt First to Make Money"

Bankers Prioritize Paying Off Mortgage Loans Over Savings
Because Loan Interest Rates Are Higher Than Deposit Rates

Short-Term Revolving Deposits Are Advantageous During Rising Interest Rates

Loans Secured by Savings and Deposits Have Lower Interest Rates

[Asia Economy Reporter Shim Nayoung] Seo Nayoon (43, pseudonym), who works at a commercial bank, has been paying an extra 300,000 KRW each month toward her mortgage loan since last month. She looked into some savings products with the idea of using money for stocks, but the reality was that the interest rates on savings were much lower than the mortgage loan rates. Seo said, "Even after considering preferential interest rates, the savings interest rate did not exceed 3%," adding, "As soon as I was notified that the mortgage loan interest rate had risen close to 4%, I started repaying the mortgage more with the money I would have put into savings without hesitation."

In the current period of rising interest rates, the primary principle recommended by bank employees to save on interest is 'loan repayment.' According to the Bank of Korea's data on new deposits at deposit banks (May), the interest rate on savings deposits was 2.02%, while the household loan interest rate was 4.14%. Since deposit interest rates cannot keep pace with the rising loan interest rates, bank employees advise that repaying existing loans first is the way to earn even a little more interest.

Idle Funds Should Be Managed with Short-Term Revolving Deposits
Savings Should Be Opened at as Many Banks as Possible

With the Bank of Korea likely to implement a 'big step' (a 0.5 percentage point increase in the base rate) on the 13th, bank interest rates have become a hot topic. Methods to earn 1%p more interest or pay less have always been a concern, but now they are even more urgent.

For those looking to deposit idle funds in banks, 'revolving deposits' (deposits with interest rates that change each cycle) are advantageous. During periods of rising interest rates, reinvesting at short intervals of six months can yield compound interest benefits. An analysis of interest earned by an individual who deposited 100 million KRW in NH Nonghyup's 'Waltz Revolving Deposit' showed that over two years (from June 2020 to June 2022), the interest earned from a 6-month fixed deposit (3,519,601 KRW) was higher than that from a 12-month fixed deposit (3,467,462 KRW).

An NH Nonghyup official explained, "Even during the ultra-low interest rate period of the past two years, short-term deposit interest conditions were more favorable," adding, "In the current rising interest rate environment, joining savings and deposits for a short term will ultimately yield more interest than long-term deposits."

If you want to open a savings account, the strategy is to join as many bank products as possible, filling each up to the maximum amount allowed. A Shinhan Bank official said, "These days, many banks offer special high-interest savings products to attract new customers for their first transactions," adding, "Although the high-interest rates come with limited subscription amounts, by putting in the effort to sign up with each bank, you can accumulate a considerable amount." For example, 'Shinhan Annyeong Bangawo Savings' and 'Solmanhae Savings' offer preferential rates of 4.6% and 5.0% annually, respectively, for first-time transactions or first app transactions.

Signing up for products via apps rather than bank branches is a way to earn more interest. For instance, KB Kookmin Bank offers the 'KB Star Fixed Deposit,' which currently has the highest interest rate among products on sale. It can only be subscribed to through internet banking, KB Star Banking, or call centers. The interest rates are 2.73% for deposits between 12 months and less than 24 months, and 2.84% for deposits between 24 months and less than 36 months. A KB Kookmin Bank official explained, "There are non-face-to-face exclusive products, and even if you can subscribe at a bank, sometimes preferential rates are available if you subscribe non-face-to-face."

[Image source=Yonhap News]

During Interest Rate Hikes, Long-Term Loans Should Have Fixed Rates, Short-Term Loans Variable Rates
Variable Rates Are Better for Personal Loans

How should you lower interest rates when taking out a loan? If you have deposits, savings, or subscription products at a bank, using these as collateral for a loan can provide better interest benefits. Interest on collateral loans linked to deposits and savings is calculated based on deposit interest rates and is about 1 percentage point cheaper than general loans. It is essential to take out loans from your main bank. You can receive preferential interest rates through your card usage, salary transfers, and housing subscription savings performance.

Bankers also point to the rule: "During periods of rising interest rates, long-term loans should have fixed rates, and short-term loans variable rates." A commercial bank official said, "Fixed rates are calculated based on AAA-rated financial bonds, which reflect the expected direction of the base rate in advance," adding, "Therefore, for long-term products like mortgage loans, fixed rates seem somewhat advantageous in the current situation." He continued, "If you plan to repay the loan within a short period after borrowing, it is better to choose relatively cheaper variable rates rather than fixed rates, which have already risen." Generally, fixed rates are about 1 percentage point higher than variable rates under the same conditions.

For personal loans, interest rates are usually recalculated annually upon extension, reflecting any rate increases, so there is no reason to choose fixed rates, which are higher than variable rates.

When taking out housing-related loans such as mortgage or jeonse (key money deposit) loans, you should check whether you qualify for government policy financial products with lower interest rates. Although income and asset requirements are strict due to the low interest rates, if you meet the criteria, you can get loans at much lower rates than commercial banks.