70% off mortgage interests

How Does An Interest Offset Account Work?

In recent weeks, I noticed some mortgage banks here in Singapore begin moving away from selling on interest rates per se but focusing instead on offering an interest offset account alongside the home loan.

It is an interesting proposition to me and one that might make sense especially for those with liquid funds on disposal.  The only downside is that it may come with a higher spread than normal.  There is no free lunch in this world I guess.

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In this article let us take a quick look at how an interest offset account works.  Though it goes by different names and some slight variations in its mechanism, the basic concept is the same – you offset your mortgage interests by the deposit interests you earned, up to a certain amount.

There are currently four banks selling this feature in the market and we will look at them one by one.  We think Stanchart has the most compelling proposition by far :

1. MortgageOne – Stanchart

Stanchart mortgageone illustration

In the example given above, a borrower has $300,000 cash on hand but still decide to take out a loan of $600,000.  What happens is that Stanchart will pay the same deposit interest of 3.5% as his mortgage interest for up to maximum 2/3 of the amount deposited in the MortgageOne account.  This amount deposited is of course capped at the amount of his outstanding loan.  Which effectively means that the maximum one can “offset” is up to about 2/3 of the mortgage interests payable every month (ignoring the slight discrepancies due to daily or monthly rest nature of the loan and MortgageOne account).

What we like about MortgageOne is that it gives a high offset limit (66.66%) and it is applicable to any of the floating rate home loan packages that you take up from Stanchart which means you are enjoying a competitive loan spread, not a higher one for the offset feature.

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2. SmartMortgage – HSBC

HSBC’s version is called SmartMortgage which links your home loan account with a current account.  It is only for sibor-pegged home loans with HSBC of minimum loan of above $500,000.  What happens is that the interest earned on your current account, which matches that of your mortgage interest, will be capped at 70% of your outstanding loan interest.  In other words, you can offset up to a maximum of 70% of your mortgage interests which is the highest in the market now.

However SmartMortgage is only available when you take up a specific home loan package from HSBC that comes with a much higher spread of 1-month or 3-month sibor plus 1.35% for Premier banking customers of the bank.  And this spread applies from the 1styear of the loan until the end of the tenure.  This is high compared to the usual promotional spread of 0.8-0.9% for the first 3 years of the loan.  And even when the promotional period ends, most banks will revert to the higher spread of only 1.25%.  Hence in a way you can say that the bank has built in its profit in the spread.  Put it in another way you are paying about 50 basis points or 0.5% (1.35 – 0.85) more interests in the initial few years of the loan, for the flexibility of “drawing down” on the facility when you need the funds back.

3. Cash Management Account – Citibank

Citibank’s Cash Management Account (CMA) is also a current account that is linked to its home loan account.  In this case an interest would be paid on your funds in CMA after applying an adjustment rate of up to 50% of your mortgage interest rate.  This interest paid, or what is called an adjustment in Citibank’s lingo, is then used to offset against your home loan interest.  In short, the maximum you can offset would be 50% of your mortgage costs subject to some variations in the way interest is compounded.

The good thing about Citibank’s CMA is that it works in the same way as Stanchart’s MortgageOne, where it is offered with most of their existing competitive sibor home loan packages with an adjustment rate which is set at 50%.  There is no higher spread on the mortgage loan due to the offset feature, albeit there is also a minimum loan of $500,000.

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4. HomeStar Account – UOB

UOB’s interest offset account is called HomeStar and is only available to their Wealth Banking (AUM or Assets Under Management of $200,000), Privilege Banking (AUM $350,000) and Private Banking clients.

The offset limit is 50% just like Citibank’s CMA however this current account is only available on certain selected packages.  UOB started with only one loan package set at a single rate of 2.98% p.a. which applies throughout the entire tenure from first year till the end.  This is obviously much higher the prevailing floating rate until such time when sibor and board rate catches up.  However the bank recognized the shortcoming and has recently introduced a few more packages for private property borrowers who want the interest offset account.

In the next post, we will look at what are some scenarios where it makes sense to sign up for a mortgage with an interest offset account.

At MortgageWise.sg, we seek to be your mortgage solutions partner and take pride in being able to give truly independent advice sometimes asking clients to re-price and stay with their existing bank if it doesn’t make sense for them to move. We may not get to do business with you the first time round, but we will try again. We strive to be your first choice mortgage partner when you buy Singapore condo. Meanwhile do sign up for our newsletter on our website and stay tuned to this blog as we bring you purposeful and proprietary news summary & insights.

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