Housing loans are one of the biggest financial liabilities we have in our lifetime. With the current low interest rate environment, a $500k loan over the low interest would still amount to a $120k payment towards interest over a 30-year tenure. Here, I’ll be sharing more about how we can reduce the so-called $120k paid towards interest.
What is a Mortgage Interest Offset Account?
It is a repayment account tied to your mortgage – the account acts like a savings account in which your monthly instalments are deducted from, and deposits in the account earns higher interest that matches your mortgage interest rates.
They have been around in the market for quite some time, yet not many are aware of such a feature; you can actually offset up to 100% of your mortgage interest!
As of today, there are currently 3 banks that offer mortgages with interest offset feature, and they are Standard Chartered Bank, HSBC and Citibank. This is how they work:
| Standard Chartered Bank (MortgageOne) | HSBC (SmartMortgage) | Citibank (Cash Management Account) |
| Two-third of your deposits, capped at outstanding loan amount earns the interest charged to your mortgage loan. The remaining one-third and any excess deposits earns 0.25%. | 70% of loan or deposits, whichever is lower, will earn the same interest as what is charged to your mortgage loan. The remaining deposits does not earn any interest. Any excess deposits also do not earn any interest.
|
Deposits up to outstanding loan amount earns 50% of interest that is charged to your mortgage loan. Any excess deposits earn 0.125%. |
To go a little more in-depth on how they work, rather than reducing your monthly instalment, you will still be paying the same amount every month but interest earned will be used to offset against interest payable, thus more of the monthly instalment will be used to reduce the principal. What this means is that you get to pay off your principal faster!
So, which is the best one among these 3?
It depends on how much deposits you have!
Here are some illustrations:
- Assuming you have a $1mil loan and $500k deposits
| Standard Chartered Bank (MortgageOne) | HSBC (SmartMortgage) | Citibank (Cash Management Account) |
| $333,333.33 will earn the same interest as your mortgage. Remaining $166,666.67 earns 0.25% interest.
|
$350,000 will earn the same interest as your mortgage. Remaining $150,000 does not earn any interest.
|
$500,000 will earn 50% of your mortgage interest, we can also rephrase it as $250,000 earning the same interest as your mortgage. |
- Assuming you have a $1mil loan and $1mil deposits:
| Standard Chartered Bank (MortgageOne) | HSBC (SmartMortgage) | Citibank (Cash Management Account) |
| $666,666.67 will earn the same interest as your mortgage. Remaining $333,333.33 earns 0.25%. | $700,000 will earn the same interest as your mortgage. Remaining $300,000 does not earn any interest. | $1,000,000 will earn 50% of your mortgage interest, we can also rephrase it as $500,000 earning the same interest as your mortgage. |
- Assuming you have a $1mil loan and $1.5mil deposits:
| Standard Chartered Bank (MortgageOne) | HSBC (SmartMortgage) | Citibank (Cash Management Account) |
| $1,000,000 will earn the same interest as your mortgage. Remaining $500,000 earns 0.25%. | $700,000 will earn the same interest as your mortgage. Remaining $800,000 does not earn any interest. | $1,000,000 will earn 50% of your mortgage interest, we can also rephrase it as $500,000 earning the same interest as your mortgage. Remaining $500,000 earns 0.125%.
|
Below are other details for comparison:
| Standard Chartered Bank (MortgageOne) | HSBC (SmartMortgage) | Citibank (Cash Management Account) | |
| Building Under Construction (BUC) |
✔︎ |
✘ |
✔︎ |
| Completed Properties |
✔︎ |
✔︎ |
✔︎ |
| SIBOR Package |
✔︎ |
✔︎ |
✔︎ |
| Fixed Deposit Rate Pegged Package |
✔︎ |
✘ |
✘ |
| Fixed Rate Package |
✘ |
✘ |
✘ |
| Offset on Equity Term Loan Portion |
✔︎ |
✘ | Only offset on Housing Loan or Term Loan, whichever is higher |
Why and how are they good for borrowers?
With the possibility of offsetting up to 100% of the mortgage interest, effective interest rate is lower. Also, you get to pay off the mortgage sooner as more of your instalment goes into reducing the principal.
The funds in the account are completely liquid – full flexibility in withdrawing and depositing funds.
In a way, the non-invested emergency funds that are sitting in the banks’ deposit accounts earning a mere 0.025% to 0.05% can be put to better use this way and generate more interest than the traditional savings account.
