An interest offset account is one of the most useful features you can find in a mortgage loan which often gets overlooked or misunderstood for example one common objection we hear goes like “I can offset myself”.

By and large, interest offset accounts had been sidelined for most parts of last few years as when interest escalates and stay high, the natural instinct for borrowers is to deleverage by paying down big portions of their outstanding mortgage. No one likes to commit to a big mortgage repayment every month which can be quite a strain on cash flow.

In addition, interest-offset account works only if you take up a floating rate mortgage but not fixed, which explains why no one is interested as homeowners scrambled for the safety of fixed home loan rates in the last few years.

However, all that is going to change with a return to sub-2% mortgage rate environment going into 2026, and may well be so for a protracted period of time thanks to the deflationary effects of A.I. The reverse of deleveraging is taking place now where more homeowners are “taking back” the leverage via a home equity term. You do that when monthly repayments become affordable again and you rather keep the liquidity in case of economic stresses (why interest drops) and when the search for yield returns (money left in the bank is losing value with high inflation).

I’ve already dropped the biggest hint on why an interest offset account can be the most useful loan feature for those who believe and see mortgage as the best form of leverage to deploy to power investments in one’s working life – you only need to be assessed once for the maximum loan, then use interest-offset as a lever to scale up or down the amount of leverage you like to use at various points depending on your financial objectives.

I will delve into more details the benefits of interest offset account later but first let me explain how it works.

There are two mortgage lenders in Singapore who offer interest offset account selectively as part of their Singapore mortgage product – StanChart and HSBC. In this article, we will illustrate how such an account works with StanChart’s version which is called MortgageOne account.

(Note: StanChart’s MortgageOne is applicable only for private property mortgages but not HDB bank loans.)

StanChart Singapore’s website has an explainer on how MortgageOne works including videos and a calculator that shows the reduced total interest paid, shortened loan tenure as well as effective mortgage rate if one finishes repaying the loan in full.

This article aims to supplement the official page from the bank, by taking a closer look how the offsetting actually works based on the first month’s repayment, based on a typical private property home loan of $750,000.

What is a mortgage interest offset account?

In one sentence, it’s basically a savings account which pays the same deposit interest as your mortgage rate hence effectively “offsetting” the loan interest as if you are not servicing the loan.

However, the catch is you can’t offset on any unlimited amount of funds deposited and the higher interest is only paid up to a certain cap based on the size of your mortgage loan, at any one point in time.  In the case of MortgageOne, it’s capped at two-thirds of the amount deposited.  The remaining one-third of your funds will still earn interest at 0.25% albeit negligible.

How does MortgageOne work?

Assuming John just refinanced an outstanding housing loan of $750,000 to StanChart on a 25-year tenure at a mortgage interest of 1.50%.  We take a look at the “interest offset” effect when John deposits $210,000, $750,000 (equivalent amount to his loan) and $1.2m into his MortgageOne account:

	Scenario A	Scenario B	Scenario C	Scenario D
	No Interest Offset	With MortgageOne	With MortgageOne	With MortgageOne
Outstanding Loan	$750,000	$750,000	$750,000	$750,000
Mortgage Interest (Yr 1)	1.50%	1.50%	1.50%	1.50%
Deposit Balance (MortgageOne Account)	Not applicable	$210,000	$750,000	$1,200,000
Qualifying Deposits (67%)	Not applicable	$140,000	$500,000	$750,000*
– Interest Earned** Per Month (1.50%)	–	$175	$625	$938
Remaining Deposits	Not applicable	$70,000	$250,000	$450,000
– Interest Earned Per Month (0.25%)	–	$15	$52	$94
Total Interest Earned	Not applicable	$190	$677	$1,032
Monthly Repayment#	$3,000	$3,000	$3,000	$3,000
– Interest Offset	–	$190	$677	$938
– Interest paid to bank	$938 (No offset)	$748 ($938-$190)	$261 ($938-$677)	$0 ($938-$938)
– Principal reduction	$2,062	$2,252	$2,739	$3,000
Interest Cost Reduced By#	0%	20%	72%	100%
Effective Interest Rate# (After Offset)	1.50%	1.20%	0.42%	0%

* Two-thirds of the deposits will earn the same mortgage rate but not more than the outstanding loan 
** This is only an estimate which is slightly overstated as we apply the same mortgage interest rate of 1.50% p.a. (or 0.125% per month) on 67% of the deposit balance (qualifying deposits) on a simple straight-line basis, without the effect of daily rest and without considering average monthly deposit balance or other configurations in the bank’s system.
# This is based on the 1^st month’s ammortisation where the interest-component in the monthly repayment is at the highest.  The interest-component goes down and the principal-reducing component goes up over time in mortgage ammortisation. As such, the actual interest costs reduction ratio is actually higher and the effective interest rate even lower over the period of the mortgage.

In Scenario A for a typical mortgage with no MortgageOne account, mortgage interest of $2,500 forms about 63% of the total monthly repayment.  By depositing $210,000 of his spare funds into MortgageOne in Scenario B, John manages to cut his interest costs down to just $748 which is a reduction by 20%!  This shaves his effective interest rate down from 1.50% to 1.20%.

John will not see the total deposit interest earned of $190 in his MortgageOne account.  He still services the mortgage at the same monthly repayment of $3,000.  However, as more of what he pays every month goes to reducing his principal outstanding ($2,252 instead of just $2,062), he will finish paying off the mortgage earlier.

In Scenario C, John amassed enough savings to completely repay his entire loan of $750,000 but chooses instead to continue with the mortgage and park the funds into MortgageOne.  He get to keep all his liquid funds at a mere cost of funds at only 0.42% per annum!

It’s unlikely anyone will consider offsetting the mortgage interest down to zero like in scenario D.  To do that, John needs to deposit a lot more into MortgageOne as only two-thirds of the deposits can be used to earn offset interest, and this amount is also capped at no more than the outstanding mortgage loan.  Here, though there is no longer mortgage interest to pay, John is effectively earning only 0.25% p.a. on remaining deposits of $450,000 ($1,200,00 less $750,000) which is not a wise move.

Note as mortgage ammortisation is always on a reducing-interest repayment over time, we are using a snapshot of the first month instalment where interest-component is the highest in this illustration to be conservative.

Benefits of a mortgage interest offset account

Some people compare the return from interest offset accounts with those from high-yielding savings accounts (DBS Multiplier, UOB One, OCBC 360) and concluded they are better off doing this “interest offsetting” on their own. This may or may not be true as they come with different considerations.

Before we discuss the benefits of interest offset, let me first differentiate between liquid funds and investible funds.

Liquid funds vs. investible funds

Almost everyone will keep liquid funds at bay as no one uses up all their savings to the last drop every month and be left penniless in times of urgent needs. It’s only a question of how much you set aside for such emergencies. For some it could be just 3 to 12 months of your pay, for others it could run in excess of $200,000 for those with heavy financial commitments.

Liquid funds for yet some others might also include savings stashed away for budgeting purpose like the annual premiums payable for the whole family’s insurance coverage including hospital shield plans, or for a particular project like your child’s overseas education, graduation gift, or simply a year-end family vacation. You get the idea here – liquid funds must stay liquid and accessible in the short term, and not be locked away in investments where capital value can rise or fall.

The opposite will be investible funds where you seek capital gains or income or both. Depending on what asset class you invest in, generally funds flow tend to be large sums in both directions (funding to or making withdrawal from your investment account). From time to time, while waiting for the next opportunity, you might also need to park your funds for a short period somewhere whether that means a few months or a few days. Even for the latter, you’ll want to be paid some return due to the sums involved.

Benefit 1: (With liquid funds) Reduce interest costs while on a floating rate home loan

The most obvious benefit of an interest offset account is that it effectively lowers your mortgage interest paid every month, as seen in the example of John above.  By depositing about a third of his outstanding housing loan, he is able to shave off about 20% of the mortgage interest and reduced his interest rate from 1.50% to 1.20%. Our illustration is conservative by using only the first month’s mortgage repayment and a deposit of less than a third of $750,000.

With that in mind, why bother to compare differences in floating SORA spreads across different bank package in the first two years? Those differences of typically 0.05-0.10% are unlikely to outweigh a 20% savings derived after interest offset.

Of course, not everyone has so much liquid funds as a third of the outstanding loan to be stashed away in MortgageOne. Or perhaps not everyone has so much liquid funds to allocate between various options like short-term fixed deposits, high-yielding savings account like DBS Multiplier account, money market funds, or perhaps even Singapore Savings Bond.

Before you decide where to park the money, you need to consider the return and liquidity for each option. For this purpose, one way to determine the return from MortgageOne account is to look at it like a “blended” deposit interest rate at about two-thirds of your mortgage rate (since one-third of your funds earn little interest).  At today’s prevailing floating mortgage rate of about 1.50%, that’s like a savings interest rate of 1% (2/3 of 1.50%).

I will not dispute that you may earn more interest with high-yielding savings account. However, there are various conditions to fulfil and not everyone likes the idea of changing their salary-crediting bank, spending on a new credit card, or even doing investments with the bank. Not to mention the high interest also gets adjusted down frequently with falling interest rate and is paid only up to a certain deposit amount like $100,000 or $150,000. So, when you withdraw your funds temporarily which may happen from time to time, your “average return” drops. Finally, high-yielding savings account can’t achieve the effect of “reducing your outstanding mortgage loan balance” every month as your interest is calculated on monthly rest, so you will pay less interest costs over time. In short, you can’t achieve any “compounding” effect.

As we enter the disruptive age of A.I. in the labour market, there may be a need to set aside even more liquid funds in excess of $150,000. As such, having access to a mortgage interest offset account will provide more avenues to “earn” a decent return on all your liquid funds without all the hassle and cumbersome conditions imposed by the bank.

More importantly, it’s a place to hold significant amounts of your investible funds whilst awaiting the next opportunity, which brings me to the next point.

High-yielding savings account can’t achieve the effect of “reducing your outstanding mortgage loan balance” every month as your interest is calculated on monthly rest, so you will pay less interest costs over time. In short, you can’t achieve any “compounding” effect.

Benefit 2: (With investible funds) Pay down temporarily without actually doing prepayment

Investible funds are fairly large sums of money which you need to park somewhere in the short term while you decide where best to deploy them next. Some examples could be:

• Sales proceeds from a property which could come in stages from option fee, whole deposit (at times), and the final gross profit after completion
• Rental income (along with security deposit) from properties which goes to offset monthly mortgage repayment
• Sales proceeds from disposal of other asset classes like unit trusts, crypto, gold, etc.
• Proceeds from sale of stocks and shares when you decide to stay on the sidelines while waiting for some market pullback
• Dividends or distributions paid out from companies and REITs that you own
• Big bonus payout from the company which you have yet to decide on its use

And the list goes on.

The most viable option for parking such large sums of money in the short term where you can withdraw them quickly, yet which still earns you some return, will be either in money market funds or a mortgage interest offset account. You will appreciate the idea of keeping them liquid in a bank account for ease of withdrawal without any costs or conversion fees.

It makes perfect to use these large sums to “pay down” on your mortgage and save you some mortgage interests while you plan and figure out your next move. The problem is – doing actual prepayment is easy with a one-month’s notice to the bank, but taking back those funds later will be complicated with long-drawn-out process (4-6 weeks), strict LTV (loan-to-value) limits and TDSR rules to adhere to, when applying for home equity loan. Bottomline is you may not be able to borrow the same amount that you have prepaid earlier and may even hit a snag in the process! Not to mention you end up with different lock-in expiry dates on the same property which complicates your refinancing later.

A mortgage interest offset account offers you the most hassle-free, cost-free and transparent way to “prepay without actually doing prepayment” on your mortgage loan in the short-term. Getting your investible funds back is as simple as making a withdrawal from your bank account!

Benefit 3: Power your investments with the best leverage solution

If you’re still looking at and comparing mortgage interest offset account with high-yielding savings account from banks, you may be missing the point here.

Going by the annual OCBC Financial Wellness Index survey in 2024, more and more Singaporeans are not ready for retirement and hence more are opting for the most basic retirement lifestyle especially amongst those age 60 and above.

After experiencing the high inflation of 2022 to 2024, with prices staying elevated since, the urgent need to plan for retiring well in Singapore cannot be overstated especially given that we live longer yet face more labour market disruptions by A.I. & robotics in the next few decades.

The use of leverage, not for consumption or instant gratification but to boost returns in investment, may realistically be one of the few ways to overcome this gulf in retirement planning shortfall, especially for those who are late in the process. To this end, mortgage is the best form of good debt which is not only the safest (no margin call), but the least cost (secured lending).

More than just functioning like a “saving account that pays 2/3 of the mortgage interest on your deposits”, an interest offset account acts like a lever which allows you to effectively scale up and down the deployment of leverage by simply doing deposits or withdrawal of your funds, both liquid and investible funds.

It’s this exact scalability on the use of leverage throughout your working life that you should see much value in, not so much what deposit interest you get paid. After all, earning marginally more in deposit interest amounts to just a few hundreds or thousands more typically, versus 3x to 5x more return on capital for your investments! That’s how you get into property investment in the first place, because of the presence of leverage (With LTV of 75%, a 25% increase in property price will mean a 100% return on your capital).

We’re not qualified financial advisors to tell you what to invest in. But for those who understand, appreciate, and desire the power of leverage to drive investment returns, you’ll want to get assessed one-time for the maximum loan (highest leverage) at the most optimal monthly repayment amount (most comfortable), whilst still earning good income. Thereafter, instead of paying down the loan over time, you could simply scale up and down your use of leverage through MortgageOne account!

A mortgage interest offset account offers you the most hassle-free, cost-free and transparent way to “prepay without actually doing prepayment” on your mortgage loan in the short-term. Getting your investible funds back is as simple as making a withdrawal from your bank account!

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