With rates staying lower for slightly longer period into 2017 (even if Fed raises rate by Dec 2016) and more uncertainties and headwinds for the Singapore economy with more job losses expected, suddenly the purpose and benefit of MortgageOne– an interest offset account for mortgages by StanChart, has become more substantive.
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What Is An Interest Off-set Account?
The concept is simple – while one still pays the same monthly repayment amount every month, by depositing funds into such an interest-offset account like MortgageOne which is like a savings account, the interest portion of the mortgage payment is being reduced by a matching deposit interest earned on the funds deposited into the MortgageOne account and hence more of the instalment paid now goes to reducing the principal loan.
The maximum funds that one can deposit into MortgageOne account to earn this matching mortgage interest rate will be capped at the outstanding loan size, and only two-thirds of the funds will earn this special matching interest, the remaining one-third will be earning the normal savings account interest.
How Does MortgageOne Benefit Homeowners?
There are two situations where interest-offset offers benefits, and incidentally the two are at the ends of a continuum in terms of the use of leverage.
First, this applies to those who believe in the use of maximum leverage to create wealth and would seek to fully utilize one’s capacity for debt (within the threshold of TDSR). Many a times successful investment requires patiently holding on to one’s cash and waiting for the right opportunity to get into financial markets especially in times of major market corrections. Timing is everything and when such opportunities arise, investors would want to be “ready to pounce” and not have to waste precious time applying for maximum leverage. MortgageOne would help position such investors for such opportunities. While waiting which could take months or even years an investor will not need to pay higher interest as his existing liquid funds will be earning deposit interest matching that of his mortgage rate, up to 2/3 of his outstanding loan, essentially he is paying down his loan faster.
The second group on the other hand is conservative by nature, does not believe in the use of leverage, and in fact seeks to pay down their outstanding mortgage as quickly as they can. Logically they should take the minimum loan needed and pay down using all their equity be it cash or CPF. The truth is however most of us lie somewhere in between conservatives and risk-taking. It does not make sense to use up one’s cash and put it fully into an illiquid asset like real estate. What most would do in this group, being conversative and risk-averse, is to take additional loan in case of any unforeseen changes to one’s income position later on rendering refinancing or applying for a bigger loan difficult, but in the meantime keep their cash within easy access for rainy days. What better way to do that than MortgageOne? Put that cash back into “reducing” the loan until such time when the additional loan is really needed. Simply withdraw one’s own funds out from one’s MortgageOne account.
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Are There No Other Lenders In Singapore Offering Interest-Offset?
While there are other banks like Citibank, HSBC or UOB that offers interest offset account from time to time, none of them make it into a strategic feature of their mortgage packages. They only offer it sporatically and in fact some requires that homeowners take up a special home loan package which comes with higher spreads in order to enjoy the interest-offset feature. This of course means it comes with a cost to homeowners. On the other hand StanChart has successfully entrenched MortgageOne as one of its core competitive feature of their home loan solutions so much so that the name as almost become synonymous to interest-offset account. Most of their home loan packages would come with MortgageOne.
At MortgageWise, we seek to provide thought leadership in the area of mortgage planning in Singapore, taking deep dive into developments and news on mortgages & helping clients track interest rate movements. We do not just go for one-time business with clients but rather choose to build long trusting relationships by giving truly independent advice to the extent of losing the deal. We strive to become the first-choice mortgage partner for homeowners and the creditable distributor of mortgage products for banks and financial institutions in Singapore.