During the U.S. interest rate hike cycle, retail banks’ preferential time deposit interest rates hit new highs. In Hong Kong, some banks give customers HKD annual saving interest rates as high as 4 to 5% to secure new funds to offset a significant surge in borrowing costs from the interbank market.
At the same time, as the tax season has come, financial institutions are vying to launch personal loans, tax loans, and stock loans, with low-interest rates and handling fees, attracting people to borrow money. Many investors and savers are now thinking of borrowing money and depositing it in a time deposit plan, earning an interest rate difference of up to 3% or more. These practices seem easy to make free money, but there are some risks in real practice.
Your profit is not equal to the interest difference.
In some online discussions, we can see some netizens and even influencers use an oversimplified formula of “time deposit interest return – personal loan interest expense” to calculate the total return.
Assuming the deposit amount is HKD 1,000,000.00 the deposit annual interest rate is 5%, and the one-year deposit interest return is HKD 50,000.00 Meanwhile, suppose the loan amount is HKD 1,000,000.00 the APR of the loan is 2%, and the repayment period is 12 months. Then the interest expense of the loan is HKD 10,767.00. Does it mean you can earn all the interest difference between the time deposit and the loan?
The answer is no because most installment loans require the borrower to start the monthly repayment immediately after the loan is withdrawn, while the time deposit releases the interest until the maturity date. If the borrower puts all the loan amount in the time deposit, he may run out of cash to repay the loan. Therefore, borrowers must reserve part of the funds for repayment and cannot put all of them into time deposits, or they may only place time deposits for 1 or 3 months and then withdraw some money to repay the loan. This means borrowers cannot maximize the loan to earn saving interest.
You may not get the lowest loan APR.
Whether the bank grants you the best loan interest rate depends on many factors, including your loan amount, repayment period, credit scores, outstanding debt, income, and more. If your loan APR increases, the interest rate difference between your time deposit and loan will also narrow, and you will earn less.
Failing to gain profit when the stock market bounces.
It may be unbelievable to say this now, but the stock market will rebound one day. If you do a 4% or 5% fixed term and lock up HKD 1,000,000.00 of funds for a year, and the stock market rebounds during the period, even if it only rebounds by 10%, you will miss this chance of gaining the profits. Borrowing a low-interest loan against stock makes more sense if you want to keep your exposure to the stock market in the bear market and increase liquidity while waiting for a market rebound.
Uncertainty about future interest rates.
When the interest rate rises, time deposits seem more profitable, but keep in mind that the interest rate can either increase or fall, and the future interest rate is uncertain. After the maturity of your current time deposit scheme, the interest rate of your next deposit may be lower than before.
Market analysts expect the U.S. Federal Reserve’s interest rate hike cycle to end in 2023. By then, deposit interest rates can be significantly lowered, and you will have to go back to the stock market or other assets in pursuit of higher profits.