Besides earning higher interest, your fixed deposits account can also be used for other purposes. Here are 4 alternative ways you may not have considered.
Fixed deposits are probably the most familiar financial products to Singaporeans. Just about everyone understands the concept - stick your money in a fixed deposit for several years, earn interest, and use it to boost your retirement fund (or pay for something like your house). But there are other uses for it too, that you may not have realised:
1. Lowering Your Home Interest Rate
Did you know that your fixed deposits can be used to lower your home interest rate?
Some banks offer an interest offset mortgage loan. This type of home loan has a special feature; it considers a part of the your loan to be be “paid” by an existing fixed deposit. This lowers the interest paid on the outstanding amount. For example:
Say you have a substantial fixed deposit, of S$150,000. You then take a bank loan of S$300,000 for your flat. An interest rate of two per cent per annum* is applied, for the next 25 years.
By the end of the loan tenure, the total interest repaid is around S$81,469.
On the other hand, say the bank offers you an interest offset option, for two-thirds of your fixed deposit (⅔ of S$150,000 = S$100,000).
This S$100,000 will be treated as if you already “paid” it into your home loan. As such, your mortgage interest rate becomes two per cent of S$200,000. The interest paid, at the end of 25 years, is only around S$54,312.
That’s a total savings of S$27,157, or just over S$90 a month for the next 25 years.
In general, interest-offset loans are only beneficial if you have a substantial amount to put in fixed deposits. If you have less than S$100,000 to put in fixed deposits, you may be better off considering other options (speak to a qualified mortgage broker or wealth manager, to find out what’s best for your specific situation).
That said, interest-offset can be a useful tool for those who have accumulated a lot of wealth/savings, but want to better manage their cash flow.
*Home loan interest rates fluctuate constantly, so it’s not possible to give you a definite percentage. However, a range of of 1.8 to two per cent is realistic at the time of writing.
2. As Collateral for a Business Loan
It can be tough for new businesses to get a loan. Most banks will only grant a loan to highly capitalised businesses, or to entities that have operated profitably for two to three years.
One way around this is to use your fixed deposits as collateral. For example, say you have S$70,000 in fixed deposits, and you want S$50,000 to fund your new business venture.
You don’t want to spend the S$50,000 all at one go - you’d rather pay it back in monthly amounts. This prevents you from wiping out most of your savings instantly, if the business fails.
You could then take a loan for S$50,000, pledging the S$70,000 in fixed deposits as collateral. If you fail to pay back the loan, the bank will keep the S$70,000. However, in exchange, you get a loan with a low interest rate, which you can pay back monthly.
Note that the interest rate can be much lower than a typical business loan, as this is a secured loan (your fixed interest is collateral).
3. Get You a Credit Card, Even if You Have Low Income
Some people may have a lot of wealth, but only a small income. A typical example would be a retiree, with large savings. In these situations, some banks will allow you to get a credit card even with a limited income.
For example, say the credit card you want requires an income of S$60,000 per annum, but you don’t have this (perhaps you are living off your accumulated earnings). You might be able to open a Fixed Deposit with S$15,000, and still get the card without meeting the requirements.
However, you must be careful to make repayments, as the bank can seize your fixed deposit if you fail to do so.
4. As Safe Haven in Times of Turmoil
Economies are prone to the occasional crashes, such as the Global Financial Crisis in 2008. In these situations, it may not be clear where to invest - just about every asset can end up transforming into a liability.
This is where fixed deposits come in. Because fixed deposits are guaranteed and insured, they can be used to safely hold money until things settle down. In the meantime, you can take loans against your fixed deposit, or simply hold on to them while they accumulate interest.
Don’t be surprised if, during an emergency, your financial adviser or wealth manager suggests re-allocating more to simple fixed deposits. This is to shelter your money, while waiting out the storm.