Deposit Offer: Is this a good deal?

[john_1122]

I have been approached by two sale representatives of a bank (the bank is one of the largest, so no fear of bankruptcy). They told me there is a promotion right now, which was previously available only through their private bank:

I put 1 M. in a deposit, and get 4% a year, fixed for 5 years. After a month, I can withdraw up to 85% of the principal at an interest rate of P-3, fixed for 5 years. Right now, that would be 2.125%. I have to keep the money on that account for 2 years minimum. After 5 years the interest rate is likely to be lower, but of course I can withdraw the money.

Now, considering the share market is at the historic maximum, I think this is great. I can keep my money at 4% and wait for the crash. When the crash arrives I can just withdraw 85% of my capital, and buy shares. Or I can do it now, and for example buy HSBC, with an dividend of 6%. It would be over 7.5% if I use 85% of my deposit.

I would be willing to put 50% of my house value, since it looks such a great deal. My mortgage rate is actually more than 2.125, so I would be better off paying off the mortgage using this fund.

But then, this looks too good to be true, so it probably is? What can be the potential problems?

Thank you very much!

[emx]

If it sounds too good to be true, then it generally is.

[traineeinvestor]

It seems like a good deal - borrow at 2.xx % (probably with cash back if its a new mortgage) and get a guaranteed 4% with minimal credit risk. If interest rates rise above 4%, you withdraw 85% and pay off the loan. The remaining 15% stays on deposit for the remainder of the 5 year term.

FWIW, if it was me, I'd take a slightly more aggressive approach and invest in riskier assets offering a higher yield without the hassle of having 15% of my money tied up for five years. You mentioned HSBC with its 6% yield - I have HSBC in my portfolio and I'd be happy to buy a few more.

[john_1122]

Thank you. The money would only be tied up for 2 years. After 2 years I can withdraw everything. On the other hand, if I want to continue, they would keep paying me 4% for 5 years.

But why would a bank do such a bad deal (for the bank)? They give me 4% for 1 million, and then I need to pay them 2.125% to borrow from them? Usually they make their money doing the opposite.

What I could do, is put 4 M in the bank, I get 4% on these 4 M, then after 1 month I withdraw 3 M, give them to my wife and she puts them in the bank at 4% (I pay 2.125% on these 3 M, so we make 1.875% with no effort and no risk). She can also withdraw 85% of these 3 M and buy shares.

Have you ever heard of such a deal before?

[tck]

If I'm understanding correctly:
You deposit 1m (for example) locked up for actually 2 year, but you can use the 4% rate for up to 5 years.
The 85% is not withdrawal, but borrowing against that 1m at P - 3?

This is HKD deposit rates? No currency conversions required?

I suppose the downside in this case is if interest rates shoot up dramatically in 2 years and you're locked in at 4%, but that's really just opportunity cost down the line.

You would need base deposit rates to go above 4% to be losing out on better deposits against your 1m, at which point you probably would have already captured some value in the current period where 4% for 2 years is higher than most people can get.

Prime would have to be at 7% for you to not like the idea of borrowing against the deposit.

Doesn't seem too bad. With regards to using the borrowed funds to reinvest in the deposit and borrowing against it again, I wonder if there are restrictions on the use of the borrowed funds or they just give it out to you in cash.

My PB had something vaguely similar. It was lending at HIBOR +0, concurrently, it was offering deposit rates on new money as high at 7%. The lending was restricted though. I could borrow at HIBOR + 0 against my investment portfolio, and only for investment grade bonds or better. The borrowed money would have to be used to finance similar investments. I couldn't go past an 85% LTV.

I thought it was pretty weird that they were offering such high deposit rates vs such low borrowing rates. The deposit rates weren't for very long though. The borrowing though, still feels pretty tasty.

[shri]

And as far as the 6% of HSBC's dividend is... perhaps we could look at if this held in the past .

And... does the dividend yield offer any protection from price declines in this case? (Yes, we have HSBC on our list.)

[orel100x]

Name the bank, I want 4%!

[freeier]

for hkd, typical 5y swap is like 2.2%.. assuming you bank is one of the chinese A rated banks, so add maybe 1.2% to the swap rate.. (SHK just issued a 10y bond @ 118 credit spread in USD, arguably HKD you can get lower spreads due to scarcity and higher liquidity)..

bank's all in cost, with no risk of early withdrawal (i.e. option given to the depositor) is just 3.4%... why should you pay 4% for that deposit that can potentially be withdrawn after 2 years..

if you are talking about a new money promotional offer for 6mth or 1year, that is explainable.. but otherwise i will really dig into the details where the catch is..

bear in mind there had been quite a few rogue brokers around cheating guys off savings by promising cheap loans... caught and reported in the press recently...

[bdw]

Agree with others that if you can invest HKD$1m into a 'time deposit' for 2 years and get 4% return with no currency or other risks then this is a pretty good deal, sounds too good to be true, so better look into the fine print.

The rest of the deal about being able to redraw 85% of your investment to use as you please at rates of around 2% sounds about right to me and not a surprise.

I've done something with a similar concept but higher risk. ie invest $1m in unit trusts that go up or down in value and pay out divdends, and then 70% of the value of the trust I can borrow as an overdraft to do with as I please. It's a multicurreny overdraft, so I can borrow in HKD around 2% same as above, or I can convert it to JPY or EUR at rates of 1% (with obvious fx gains/losses thrown in to the equation). Overall its a very powerful tool, allows me to leverage my investment, of course has risks. Now I have a huge overdraft in JPY that I'm paying 1% interest on in JPY, if the yen strengthens I will consider to make my loan even greater, if it weakens will pay some off and go back to HKD loan (but at higher 2% vs 1%), etc. It's through Standard Chartered and what they call "Wealthpro"

[john_1122]

Thank you for your comments. The bank is BOC. The currency is USD. They also have a HKD option, but with a lower interest rate.

I think I am going to go ahead. I might invest the 85% I can get back into their retirement fund. They also have a promotion and they claim they pay 4% (compound). If this is true, lending them 1 M at 4%, withdrawing 850,000 at 2.215 and using this money to buy a retirement fund at 4% doesn't seem like a bad deal. I will make sure I read the fine print.

If I give them HKD 850,000 I should receive a monthly income of HKD8,295 from the age of 65 to the age of 90 (or was it 100?), plus some cash and stuff. (I can update you once I talk to them again, if anybody is interested).

I would expect the HKD to de-peg, or re-peg, with the USD (and possibly peg the RMB) within my lifetime. Do you think it would make sense to make the retirement fund in HKD? If I remember correctly, the interest rate for HKD and USD is about the same for the retirement fund.