Interest Rates Rising... Strategies Needed for Borrowing and Saving Money Well

Efficient Loan and Savings Know-How Amid Interest Rate Hikes and Loan Regulations

[Asia Economy Reporters Park Sun-mi and Song Seung-seop] Additional increases in loan interest rates are inevitable, and with the financial authorities' total household loan volume regulations leading to simultaneous reductions in loan limits, borrowers face growing uncertainty in securing funds. On the other hand, the long-standing era of ultra-low interest rates is coming to an end, presenting opportunities to build assets. Due to changes in the financial market environment, strategies and methods for financing and saving have become necessary.

◆How to make loans more efficient?=If you are looking for a loan product intended to be used in emergencies like an overdraft account and then repaid when not needed, it is recommended to utilize dormant deposit products.

This means using a deposit-secured loan, such as the Housing Subscription Savings account, which allows you to borrow 90-95% of the saved amount. You can get a loan secured by the principal without closing the account, and the subscription function remains intact. Considering that the credit loan interest rates at the four major commercial banks have recently surged to around 3.35-4.68% per annum, the deposit-secured loan interest rate, which still maintains a level in the 2% range, is quite attractive.

If you plan to take out a mortgage loan, it is advantageous to reduce any existing overdraft accounts as much as possible. Also, if you have an overdraft account but do not use it, reducing the limit as much as possible helps increase your future mortgage loan limit. When calculating the Debt Service Ratio (DSR), the total loan amount used is based on the sum of all household debts, and for overdraft accounts, the limit amount?not the actual used amount?is reflected.

It is also better to minimize unnecessary credit loans. Generally, when calculating DSR, the maturity for credit loans is set at 5 years, while for mortgage loans, it is six times longer at 30 years. Therefore, for the same loan amount, the annual principal and interest repayment for mortgage loans is lower than that for credit loans, resulting in a lower DSR (which means a higher loan limit).

If you are worried about continued interest rate hikes, it is better to choose fixed-rate or mixed-rate mortgage products rather than variable-rate ones when deciding on a mortgage loan product.

Of course, the variable mortgage loan interest rates at the four major commercial banks currently range from 3.31% to 4.81% per annum, which is lower than the fixed rates of 3.97% to 5.37%. However, since the interest rate hike cycle has begun, choosing a variable-rate product will inevitably increase future interest burdens, so selecting a product with the longest possible fixed-rate period is the best way to reduce interest rate risk.

Bang Young-beom, team leader at Shinhan PWM Bangbae Center, advised, "It is correct to consider that the interest rate hike cycle has already started," adding, "It is time to consider switching mortgage loans to fixed rates, and during an interest rate hike period, the best way is to prepare for risks caused by interest rate fluctuations."

◆Seizing savings opportunities during an interest rate hike=With the base interest rate increases and the resulting upward trend in deposit interest rates, the expected benefits from savings are also growing.

For young adults starting their careers, the 'garo savings' method is often recommended. Garo savings is a type of life-cycle diversified savings method. It involves planning for short-, medium-, and long-term goals and dividing small amounts to save accordingly. This is advantageous for those saving for various purposes. For example, if you save 1 million KRW, you might save 200,000 KRW over one year for wedding funds, 600,000 KRW over five years for housing funds, and 200,000 KRW over ten years for retirement preparation.

The advantage of garo savings is that even after short-term savings end, medium- and long-term savings continue. This ensures solid financial management throughout the life cycle, and by saving over a long period, you can also benefit from various tax advantages such as tax exemptions. Especially, through compound interest that accumulates periodically, you can receive a relatively larger maturity amount even when investing the same amount of money.

For short-term savings, products offering high interest rates even with low limits are preferable, while for long-term savings, products like pension savings that allow small but steady contributions and offer significant tax benefits are advantageous.

On the other hand, if you are saving for a single purpose over a short period, the 'sero savings' method is more suitable. This is usually chosen when preparing housing funds, forming investment seed money, or repaying debts quickly. Since sero savings involves concentrating a lump sum in a short time, the asset formation speed is faster than with garo savings. Although it is difficult to enjoy compound interest benefits, the uncertainty risk associated with long-term savings is lower.

The 'windmill rotation' method, which involves opening fixed-amount installment savings accounts on a fixed date each month, is effective for sero savings. Like the blades of a windmill turning in sequence, this financial technique allows you to receive principal and interest gains monthly. Although it can be cumbersome due to managing multiple accounts and larger savings amounts, it allows you to receive a lump sum when maturity dates approach.

If you have a high risk tolerance or little interest in saving, you can use a 'parking account' to enjoy the benefits of saving efficiently, even with small amounts. Parking accounts are often used by customers who prefer secondary financial institutions offering higher interest rates than commercial banks.

This content was produced with the assistance of AI translation services.