Idle Funds Flowing into Savings and Deposits... Prepayment Deferral and Windmill Strategies Regain Attention

by Yoo Jaehoon

Published 20 Jun.2022 11:15(KST)

Securities and Asset Markets 'Shake'... Attractiveness of Savings and Deposits 'Soars'

[Image source=Yonhap News]

[Asia Economy Reporter Yu Je-hoon] As the benchmark interest rate rises and the asset market weakens accordingly, idle funds in the market are flowing back into banks, drawing renewed attention to financial tips such as ‘prepayment deferral’ that leverage soaring savings and deposit interest rates.

According to the financial sector on the 20th, prepayment deferral is a financial technique that combines fixed installment savings products (regular savings) with lump-sum deposit products (time deposits). It is based on the fact that the interest rate of regular savings products is generally higher than that of time deposit products.

The principle is somewhat complex. In the case of regular savings, if the agreed monthly installment is paid in advance, ‘prepayment days’ occur, and if paid late, ‘deferral days’ occur. The larger the deferral days, the more the maturity date is postponed, but if the sum of prepayment days and deferral days equals zero, the maturity date of the savings does not change. This time difference is used to maximize interest gains.

For example, assuming a financial consumer with a lump sum of 12 million KRW subscribes to a 1-year time deposit product with an annual interest rate of 3%, the interest receivable at maturity is 360,000 KRW. Even if this amount is divided and deposited into a 1-year regular savings product with an annual interest rate of 5%, the interest at maturity remains around 325,000 KRW.

On the other hand, following the most common ‘6-1-5’ method, if the same regular savings product is subscribed to and 6 months’ worth of installments (6 million KRW) is paid in the first month, 1 month’s worth (1 million KRW) in the seventh month, and the remaining 5 months’ worth (5 million KRW) in the last month, the maturity date is not delayed and the interest received is 325,000 KRW (before tax).

Prior to this, if the 1 million KRW to be paid in the seventh month and the 5 million KRW to be paid in the last month are each placed in a 3% time deposit product with maturities of 6 months and 11 months respectively, the interest amounts to 15,000 KRW and 137,500 KRW, totaling 152,500 KRW. The total interest thus amounts to 477,500 KRW, which is about 117,500 KRW more than the time deposit interest.

This financial technique is being reappraised because the interest rates on savings and deposit products have soared due to the recent rise in the benchmark interest rate. Around 3% savings and deposit products are appearing one after another in commercial banks, and some internet-only banks, credit unions, and mutual finance institutions such as Saemaeul Geumgo are also launching special savings products offering interest rates in the 5-6% range.

Meanwhile, as asset markets such as stocks and virtual assets continue to decline under the influence of the benchmark interest rate hike, classic methods such as the ‘windmill’ technique of subscribing to monthly 1-year maturity savings products and revolving time deposits with interest rates changing annually after subscription are gaining attention again. A financial sector official said, “Since there is a high likelihood that the benchmark interest rate hike trend will continue at least until the end of the year and possibly into the first half of next year, the instability of the asset market will further expand,” adding, “More financial consumers will show interest in stable investments using savings and deposits.”