StanChart offers a unique interest offset feature for its Singapore mortgage product called MortgageOne.  Interest offset accounts are very popular in countries like Australia, but remained much underappreciated by homeowners here in Singapore. However, with today’s steep mortgage rates, it may come in useful when deciding between fixed versus floating rates when you are fearful of being left high and dry on fixed rates should interest rate head south unexpectedly.

StanChart Singapore’s website explains how MortgageOne works including video explainer 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 that explanation by taking a look at how it actually benefits you using a case study based on a typical private loan of $750,000.

1. What Is An Interest Offset Account?

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 the full amount of funds deposited but it’s capped at a certain limit.  In the case of MortgageOne it’s capped at two-thirds of the amount deposited.  The remaining one-third will still earn 0.25% unlike interest offset accounts from other banks which pays nothing.

2. 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 4.00%.  We take a look at the “interest offset” effect when John deposits $210,000, $750,000 (equivalent amount to his loan) or even $1,200,000 into his MortgageOne account:

	(A)	(B)	(C)	(D)
	No Interest Offset	With MortgageOne	With MortgageOne	With MortgageOne
Outstanding Loan	$750,000	$750,000	$750,000	$750,000
Mortgage Interest (Yr 1)	4.00%	4.00%	4.00%	4.00%
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 (4.00%)	–	$467	$1,667	$2,500
Remaining Deposits	Not applicable	$70,000	$250,000	$450,000
Interest Earned (0.25%)	–	$15	$52	$94
Total Interest Earned(per month)	Not applicable	$482	$1,719	$2,594­
Monthly Repayment#	$3,959	$3,959	$3,959	$3,959
– Interest Offset	–	$482	$1,719	$2,500
– Interest paid to bank	$2,500-0 = $2,500	$2,500-482 = $2,018	$2,500-1,719 = $781	$2,500-2,500 = $0
– Principal reduction	$1,459	$1,941	$3,178	$3,959
Interest Cost Reduced By#	0%	19%	69%	100%
Effective Interest Rate# (After Offset)	4.00%	3.23%	1.25%	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 could be slightly overstated as we apply the same mortgage interest rate of 4.00% p.a. (or 0.33% 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 $2,018 which is a reduction by almost 20%!  This shaves his effective interest rate down from 4.00% to 3.32%.

John will not see the total deposit interest earned of $482 in his MortgageOne account.  He still services the mortgage at the same monthly repayment of $3,959.  However, as more of what he pays every month goes to reducing his principal outstanding ($1,941 instead of $1,459), 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 funding cost of mere 1.25% 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.

3. Benefits Of Interest Offset Account

(a) Reducing Effective Interest Rate When Opting For Floating Rate Mortgages

The most obvious benefit is that of lowering one’s mortgage interest every month as seen in the example of John above.  By depositing about one-third of the outstanding housing loan, one is able to shave off about a third on the mortgage rate. In John’s case, our illustration is conservative by using only the first month’s mortgage repayment and a deposit of less than a third of $750,000.  

This becomes very useful in times of rising interest rate as many of us have idle funds stashed away for rainy days in various deposit accounts earning meagre interests.  It helps to know when choosing floating rate over fixed rate mortgages, there’s an avenue to reduce interest costs whilst still in a lock-in period.

Another way to look at interest offset is – you are earning a “blended” deposit interest rate at about two-thirds of your mortgage rate (since one-third of your funds earn little or almost no interest).  You just don’t see the interest earned in your savings account but it’s helping to reduce your outstanding loan every month.  At today’s prevailing floating mortgage rate of 4.00%, that’s like a savings account interest rate of 2.67% (2/3 of 4.00%) which is akin to a fixed deposit rate without being locked up.

(b) Prepayment Without Actually Prepaying

You can view interest offset as earning a high blended deposit rate on your rainy-day funds.  You can also view it as taking all those emergency funds you have on standby to do a “prepayment” on your mortgage loan.  The difference – you don’t actually prepay.  You can withdraw from your MortgageOne account any amount at any time when you do need those funds – exactly for emergency situations in life.  

Contrast that with doing actual prepayment.  There are strict LTV (loan-to-value) limits to adhere to when applying to gear up or take back a bigger home equity loan as they are of higher risk to the bank than housing loan.  Bottomline – you may not be able to borrow the same amount that you have prepaid and the application process will take at least 4-6 weeks.  Not to mention you end up with different lock-in expiry dates on the same property which complicates your refinancing later.

(c) Access To Liquidity At The Lowest Cost

If we take this one step further, for high net worth individuals or investors, interest offset account offers liquidity that you can draw on when the opportunity arises.  And at the lowest possible borrowing costs you can ever find (secured lending rate on your property)!

Investors know when to enter and exit markets.  While waiting, they can park their investment funds in MortgageOne knowing that gives them the highest blended deposit return, yet with quick easy access anytime they need to deploy them for higher returns.  For seasoned investors, it’s never wise to prepay on a mortgage as that’s like terminating a huge line of credit to multiply their return. And it comes with the lowest cost of funds.

You can withdraw from your MortgageOne account any amount at any time when you do need those funds – exactly for emergency situations in life.

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