Having an interest offset mortgage account in Singapore is a hugely beneficial but less known about tool to help save on your mortgage repayments. The key would be knowing how it works for your specific requirements, the best bank to go for and if it is truly worth having such an account.
Here is everything to know about interest offset mortgage accounts in Singapore:
An interest offset mortgage account can be likened to an everyday savings account that enables you to get a high interest rate, and that matches the interest rate of your housing bank loan in Singapore.
An interest offset mortgage account enables you to both withdraw and make deposits as you would with a typical current or savings account. The major difference is that when the money is left in your offset account for a certain period, it is possible to reduce the amount of interest being charged on your home loan in Singapore.
The higher the balance of your offset account and the longer the period of time your money is held in it, the lesser interest you have to pay on your mortgage loan.
With an interest offset mortgage account, any amount that is deposited in your offset account will earn the same interest as on your mortgage. In this way, your interest expense for your mortgage is reduced and you pay off your principal balance faster.
An easy simplified example is as follows, you take out a home loan in Singapore of $300,000 with an interest rate of 2.00% and which has a linked interest offset account. You then deposit $20,000 into the offset account and keep it there for the rest of your loan tenure.
At the end of your loan tenure, your total interest will be charged on a loan amount of $280,000 ($300,000 – $20,000) instead of the actual mortgage amount of $300,000. That would indirectly also have the same effect of making a partial repayment of $20,000 towards your mortgage. Difference is that you would still have the $20,000 as free cash to be utilized instead of being stuck as equity in your property.
Keep in mind that the earned interest rate may vary depending on the bank you use, and that it may not necessarily apply to the whole sum you have in your offset account.
You will, however, be able to use the account like you would a normal savings or current account and withdraw funds whenever you need them.
An interest offset account does not reduce your monthly repayments, instead it reduces the portion of interest that is paid to the bank from your monthly installments. Let’s say your monthly mortgage repayment is $2,500 of which $500 goes towards interest. With an interest offset account, your monthly repayment would remain at $2,500 but with $200 going towards interest. This means you now have larger proportion of your monthly installment which goes to paying your principal home loan balance.
Without an interest offset account:
|Home loan||Interest Rate||Monthly repayment: Interest + Principal||Tenure|
|$300,000||2.00%||$2,500: = $500 + $2,000||25 Years|
With an interest offset account:
|Home loan||Interest Rate||Monthly repayment: Interest + Principal||Tenure|
|$300,000||2.00%||$2,500: = $200 + $2,300||23 Years|
By having a larger portion of your monthly installment going towards paying off your principal loan amount, you not only save on your interest expense but enjoy the added benefit of reducing your loan tenure.
All factors considered, using an interest offset account is generally better than paying off your mortgage for the simple reason of liquidity. With an interest offset account, you have the flexibility of using those funds to pay for any emergency expenses like medical bills or perhaps for living expenses in the event of a job loss.
Use an interest offset account when the general interest rate environment is decreasing and your mortgage has a floating interest rate. This allows you to offset the decreasing interest costs to a greater extent and save more on your decreasing monthly installment.
This allows for a double benefit of better financial cash flow through lower monthly installments and clearing off your principal balance even faster.
Pay off your mortgage early if the interest rate environment is increasing as even with an interest offset account, your monthly installments would have increased. A lower mortgage loan in an increasing interest rate environment allows for lesser interest expense without the financial strain of higher monthly installments.
At present, the three banks in Singapore offering interest offset mortgage accounts are Standard Chartered Bank, Citibank, and HSBC.
|Bank||Account Name||% of interest offset||Interest earned on balance deposits|
|Standard Chartered Bank||MortgageOne Account||(2/3) ~ 67%||0.25%|
|Citibank||Cash Management Account||50%||0.125%|
With Standard Chartered Bank’s MortgageOne SIBOR account, 2/3 or approximately 67% of the repayment account’s deposit, earns the interest charged to the mortgage loan. The remaining 1/3, as well as any excess deposits, will earn the bank’s prevailing rate of 0.25%.
Using Citibank’s Cash Management Account, 50% of the deposits will earn the same interest rate which is charged to your housing loan in Singapore. Any extra deposits will earn 0.125%.
Lastly, with HSBC’s SmartMortgage, 70% of deposits in their repayment account earns the same interest as what is charged to the mortgage loan. All remaining deposits and excess deposits do not earn any interest.
There is no minimum deposit required for all three banks, nor is there a stipulated period for the funds to be maintained in the account.
Do note that currently all mortgage interest offset accounts only apply to a floating interest rate and there are currently no fixed rate home loans with such a feature.
Let’s say you have an outstanding loan amount of $800,000 and spare funds of around $600,000 that you are thinking of placing in an interest offset account, let’s look at which bank provides the best benefit:
|Bank||Loan Amount||Deposit Amount||Interest paid on net loan amount of:|
|Standard Chartered Bank||$800,000||$600,000||$399,500|
Therefore, as seen above, on a $800,000 loan amount with $600,000 of funds placed in a interest offset account, the best bank to go for would be HSBC.
Using the SmartMortgage account with HSBC leaves you paying interest on $380,000 of your home loan amount instead of the entire $800,000 (taking into account we are ignoring effective interest paid or that the remaining funds do not earn an interest for the sake of simplicity).
The best part is you have the freedom of additional liquidity as you can withdraw your deposits of $600,000 any time you choose!
Ultimately, the best bank for an interest offset mortgage account really depends on how much deposits you have, and the bank with the cheapest mortgage loan.
You may be thinking, “Why would someone prefer to place a large amount of money into an offset account instead of paying down a chunk of their housing loan?” The reality is that an interest offset mortgage account is great for borrowers.
Instead of having a lump sum deposited into your offset account you can choose to simply deposit a few hundred dollars every month. This works towards increasing the balance of your offset account on a monthly basis which then increases the savings on your home loan interest rate. As you save more and build your own rainy day fund, you also enjoy paying off your home loan at a faster pace.
A home loan in Singapore follows a reducing balance method whereby the interest is charged on the outstanding balance of your mortgage. Taking up a new mortgage would mean the highest proportion of interest is usually in the first few years of your housing loan since that’s when your home loan would be at its largest amount. The earlier your funds sit in the offset account, the sooner you get to offset a larger amount of your interest expense.
Having an interest offset mortgage account allows you to enjoy liquidity as opposed to having your funds tied up in your property. You can then fully maximise the generally low cost of funds in Singapore and will also be able to put your liquid cash to better use—such as using it as emergency funds or investing them in higher yielding assets.
Interest offfset mortgage accounts also enable you to earn a higher interest compared to the usual savings accounts with interest rates averaging about 0.5% or less. The effective interest earned in an offset account are just as good—or even better—than the fixed deposit rates in Singapore as well.
By reducing the interest portion of your monthly installment, you get to pay off your principal loan balance much faster than you ordinarily would without an offset account. This leaves you with a lower mortgage loan amount to be paid back to the bank and therefore allowing you to enjoy higher net cash proceeds when selling off your property.
Generally, offset mortgage accounts are ideal for all types of financial profiles, from savers to spenders. Even if you are not able to save much on your offset account, you may still opt to have your salaries paid directly into your offset account. Doing so will immediately benefit you as interest on mortgage loans are calculated daily.
While an interest offset account has more pros than cons, there are some drawbacks to be aware of before choosing to go ahead:
Currently interest offset accounts are only offered for floating interest rates which fluctuate more frequently and have more volatility. Since using an interest offset account does not reduce your monthly repayments, you may have to be prepared for your monthly repayments changing frequently and if you aren’t a fan of such uncertainty, stay away from interest offset mortgages.
With a lower interest expense on your mortgage via an offset account, your bank would also make less in terms of profits on your mortgage (or known as a net interest margin). To compensate for a lower net interest margin, banks would have higher bank spreads for housing loan packages with an interest offset account. This would mean a higher total interest rate for a mortgage with an interest offset feature vs a conventional home loan.
As interest offset mortgages are only currently offered by 3 banks in Singapore, your home loan options are rather restricted. With lesser competition, this ultimately leaves you at the mercy of those banks and having to accept the relevant T&Cs which might not always be in your favour.
If you have cash tucked away in a bank savings account and it isn’t earning you more than the inflation rate in Singapore, it might be more worth it to offset this against your mortgage and ultimately lessen the amount of interest you are paying.
An interest offset mortgage account is often overlooked as a viable option simply because there is a lack of understanding as to how it can help effectively reduce interest costs.
To give yourself the flexibility to switch from an interest offset mortgage to a conventional mortgage package down the line, try opting for a home loan without a lock in period. This allows you to change your mind without having to pay heavy penalties in future.
Fixed mortgage rate home loans in Singapore are always a consideration but be aware of the shortfalls.
If you are currently on a SIBOR rate and thinking about changing to a SORA home loan in Singapore, here are 5 questions to ask!
Understand what is a SORA rate, why it was introduced and if a 3M SORA or 1M SORA is better.