Homeowners are constantly overwhelmed by the many different housing loan packages offered across banks in Singapore. While homeowners generally seek for the most competitive housing loan rate or packages, they often overlook other available mortgage product features, which help assist in further reduction of financing cost.
As such, innovative mortgage product features such as the Interest Offset Account are generally assumed as a mere gimmick or is not a good fit in homeowners’ financial plans. This is merely due the lack of knowledge or understanding in how it helps in increasing cost savings opportunities.
What are Interest Offset Accounts and how do they work?
An Interest Offset account is generally the repayment account that is tagged to your housing loan. Like all repayment accounts, it is a savings account used for your monthly repayment and other miscellaneous costs pertaining to your housing loan. Unlike a normal repayment account that generates no interest on your deposit, this account will be able to give interest rates that match your housing loan interest rate to your deposit. The matching interest rate, however, does not apply to your full deposit, but to a certain percentage, depending on the features offered by each bank. These Offset accounts do not require the funds to stay for a fixed period of time, no minimum requirement to qualify for the interest earnings and other terms and conditions to be fulfilled.
What’s in it for borrowers/homeowners?
The interest-offset account will be able to give the following benefits to the borrowers:
- The effective interest rate will be lower as interest charged on mortgage loan is reduced
- Tenure shortened as principal payment increases while monthly instalment remain the same
- Outstanding housing loan is paid up faster, thus reducing cost of financing as a result of interest charge on a smaller loan quantum
- Interest savings increases when deposits are maintained at the same amount or more, as the balance outstanding will reduce significantly with the off-setting feature
- Possibility of an interest-free loan
Who can benefit from it?
The Interest Offset Accounts will benefit majority homeowners, as the account is not necessarily meant only for those with sufficient deposits or high net worth individuals.
Any borrower can use this as their savings account to earn higher interest rates as compared to the traditional savings account. Depositing a couple of hundred dollars a month can reduce the overall interest payment as effectively as a one-time lump sum deposit to offset the housing loan interest.
In a high interest rate environment, borrowers can capitalise on the situation by using this account to earn higher interest rates from the matching interest rates and reduce the cost of financing. This account can act as a hedging tool to deter high borrowing costs in a rising interest rate market.
Let’s look at the product features
Citibank – Cash Management Account (CMA)
Citibank’s CMA allows borrowers to enjoy 50% of the housing loan interest rate on their deposits. The interest earned, also called “adjustment” by Citi-bankers, will offset the housing loan interest payment. There is no minimum deposit needed to maintain and no lock in period on the deposit. However, the deposit amount earning 50% of the housing loan interest rate is capped at the loan outstanding. So, if there is more deposits than loan outstanding, the difference will not earn any interest. Currently Citibank offers the CMA to all SIBOR packages for any housing loan above $800,000.
| Normal scenario | Maximum offset scenario | |
| Loan amount | $500,000 | $500,000 |
| Deposit | $100,000 | $1,000,000 |
| Interest charged | 1.50% | 1.50% |
| Interest offset computation | 100% of deposit ($100,000) enjoys 0.75% (50% of 1.50%) | $500,000 deposit enjoys 50% of 1.50% (as loan amount is $500,000)The remaining deposit ($500,000) earns 0% |
HSBC – Smart Mortgage (SM)
Smart Mortgage allows 70% of the borrower’s deposit in the repayment account to enjoy an interest rate that matches the housing loan, while the remaining 30% of the deposit will not earn any interest. The total interest earned will offset the housing loan interest rate. The percentage of the deposit earning the matching interest rate is also capped at the outstanding amount of the housing loan. HSBC offers their Smart Mortgage Account to all of their SIBOR packages. Currently, they have taken a decision to load an additional Interest rate (spread) for those who opt for the Smart Mortgage feature, and is available for any loan amount above $500,000.
| Normal scenario | Maximum offset scenario | |
| Loan amount | $500,000 | $500,000 |
| Deposit | $100,000 | $1,000,000 |
| Interest charged | 1.50% | 1.50% |
| Interest offset computation | 70% of deposit ($70,000) enjoys 1.50%
The remaining 30% of deposit ($30,000) earns 0% |
$500,000 deposit enjoys 1.50% (as loan amount is $500,000)The remaining deposit ($500,000) earns 0% |
Standard Chartered Bank – MortgageOne Account (MOA)
MOA matches 2/3 of the deposit in the repayment account to the housing loan interest rate and the remaining 1/3 to enjoy the bank’s prevailing rate, which is currently at 0.25%. Similar to the other two banks, there is neither a requirement for a minimum deposit amount nor a stipulated period for the fund to be in the account. Likewise, MOA’s interest matching is capped at the housing loan outstanding amount, and the remaining deposit will enjoy the prevailing rate. The MOA account is available for any completed private property or Priority banking clients with an Under Construction private property loan.
| Normal scenario | Maximum offset scenario | |
| Loan amount | $500,000 | $500,000 |
| Deposit | $100,000 | $1,000,000 |
| Interest charged | 1.50% | 1.50% |
| Interest offset computation | 2/3 of deposit ($66,666) enjoys 1.50%
The remaining 1/3 of deposit ($33,333) earns 0.25% |
$500,000 deposit enjoys 1.50% (as loan amount is $500,000)The remaining deposit ($500,000) earns 0.25% |
The tables below illustrate a comparison of interest earned between the 3 banks’ interest offset feature. The examples are based on a $100,000 deposit and example 1 and 2 are using 1.5% p.a. and 3.5% p.a. as the housing loan interest rate respectively. Although the various packages have different spreads, we are only comparing the interest-offset mechanism between each bank in these examples.
Illustration of interest earned at 1.5% loan interest rate
| Bank | Citi (CMA) | HSBC (SM) | SCB (MOA) |
| Portion that earns housing loan interest (/month) | $62.50 (100% of deposit @ 0.75%) |
$87.50 (70% of deposit @ 1.50%) |
$83.33 (2/3 of Deposit @ 1.50%) |
| The remaining portion (/month) | NA | $0.00 (30% of deposit @ 0%) |
$6.94 (1/3 of Deposit @ 0.25%) |
| Total interest earned | $62.50 | $87.50 | $90.27 |
Illustration of interest earned at 3.5% loan interest rate
| Bank | Citi (CMA) | HSBC (SM) | SCB (MOA) |
| Portion that earns housing loan interest (/month) | $104.17 (100% of deposit @ 1.75%) |
$204.17 (70% of deposit @ 3.50%) |
$194.44 (2/3 of Deposit @ 3.50%) |
| The remaining portion (/month) | NA | $0.00 (30% of deposit @ 0%) |
$6.94 (1/3 of Deposit @ 0.25%) |
| Total interest earned | $145.83 | $204.17 | $201.38 |
So which is better?
Citibank offers 100% deposit matching, but only to 50% of the interest rate. As such, the total interest offset is not maximised. The only way that Citibank can surpass its competitors in the interest offset account is if they offer a much lower housing loan interest rate in order to have the lowest cost of financing among the 3 products.
HSBC, on the other hand, do not provide 100% matching, but 70% of the deposit enjoys 100% of the housing loan interest rate, which is the highest amount of the deposit matching out of the 3 banks. We must bear in mind, however, that HSBC loads additional margin on the mortgage rate for this interest offset feature.
Standard Chartered seems to be more balanced especially in moderate interest rate environments. To have a comprehensive view on the suitability of these products, we must also take into consideration the mortgage rate applied on the property.
