[비즈한국] Following two consecutive base interest rate hikes by the Bank of Korea, fixed deposit products exceeding 4% APR have emerged. With the Monetary Policy Committee meeting scheduled for the 22nd, people looking to deposit lump sums are facing a dilemma. Some worry that if they lock in a 1-year term now, they might miss out on future rate hikes, but fear that by opting for a shorter term, they might end up earning less interest in the long run.
If you don’t need the money in the near future, you should be cautious about shortening your deposit maturity solely on the assumption that interest rates will rise. Deposit rates vary depending on the bank and the duration of the deposit. For instance, let’s compare a 1-year deposit at 4% APR with a 6-month deposit at 3.5% APR. If you deposit 30 million won at 4% for one year, you receive 1.2 million won in interest before taxes. If you deposit the same amount at 3.5% for only 6 months, the interest is 525,000 won. To earn the same amount of interest as the 1-year deposit, you would need to earn an additional 675,000 won during the remaining 6 months. To achieve this, the interest rate for your second deposit would need to be 4.5% APR, assuming you set aside the first batch of interest and reinvest only the 30 million won principal.
What if the deposit rate rises to 4.2% after 6 months? The second interest payout would be 630,000 won, and when combined with the first, the total would be 1,155,000 won. This is 45,000 won less than if you had simply locked in the 1-year deposit from the start. Even after accounting for the 15.4% general withholding tax, you would still receive about 38,000 won less. This means that even if you reinvest at a higher rate after 6 months, the total interest earned over the year could actually be lower.
Furthermore, bank deposit rates do not always rise in tandem with the Bank of Korea's base rate. Banks determine interest rates by weighing the cost of borrowing funds elsewhere against how much more customer deposits they need to attract. Sometimes, they raise rates in advance, anticipating future hikes. In such cases, even when the central bank actually raises the base rate, bank deposit rates may only see a slight increase or remain unchanged.
However, when comparing interest, you should use the rate you will actually receive, not the top advertised rate. You might not qualify for the preferential rates you received during the first subscription when you go to renew. Even if a bank offers a maximum of 4.5% after 6 months, if your actual eligible rate is 4.1%, you won’t earn the interest calculated in the previous scenarios. If you expect rates will not rise further, you might consider locking in the current rate for a longer term, as this ensures you receive that rate until maturity even if market rates decline later. That said, sometimes the rate for a 2-year deposit can be lower than that of a 1-year deposit.
For example, assume a 1-year deposit is 4% and a 2-year deposit is 3.8%. If you sign up for a 2-year deposit, you receive 3.8% of the principal annually, totaling 7.6% interest over two years. To earn the same total interest with 1-year deposits, you would need to earn 4% in the first year and 3.6% in the second year, assuming you set aside the initial interest and reinvest only the principal (pre-tax). If you anticipate that next year's deposit rate will be lower than 3.6%, signing up for a 2-year term now is more advantageous. Conversely, if you expect it to be higher than 3.6%, it is better to wait and reinvest after a year.
If you have a fixed date for when you need to spend the money, you must choose a deposit that matures by that time. Putting money intended for a jeonse (deposit-based lease) payment next spring into a deposit that matures in the autumn will likely result in early termination and lower interest earnings. Before the Monetary Policy Committee meets on the 22nd, check the 6-month, 1-year, and 2-year deposit rates available to you on your banking app. If you are planning to shorten your maturity because you expect rates to rise, ensure you know exactly what target rate you are hoping to achieve with that decision.