By Andrew Adriaan (guest contributor)
Homeowners are overwhelmed by the many different housing loan packages offered across banks in Singapore. While homeowners generally seek the most competitive housing loan rate or packages, they often overlook other available mortgage product features, which help assist in the further reduction of financing costs.
Innovative mortgage products such as the Interest Offset Account are generally assumed to be a gimmick, but this is due to a lack of understanding in how it helps to reduce costs.
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, and there is often no minimum requirement to qualify for the interest earnings.
What’s in it for borrowers/homeowners?
The interest-offset account can benefit borrowers in the following ways:
- The effective interest rate will be lower as interest charged on the mortgage loan is reduced
- The outstanding housing loan is paid up faster, thus reducing cost of financing as a result of interest being calculated on a smaller loan quantum
- Interest savings increase 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 the majority of homeowners – the account is not meant only for 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 higher 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 mitigate high borrowing costs in a rising interest rate market.
Some specific examples
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 an “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.
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.
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.
The tables below compares the interest earned between the three 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
Illustration of interest earned at 3.5% loan interest rate
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 three products.
HSBC, on the other hand, does 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 three 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.
One final point to note: To have a comprehensive view on the suitability of these products, we must also take into consideration the mortgage rate applied on the property.
By Andrew Adriaan, Associate Director, Redbrick Mortgage Advisory. Andrew spent the last 7 years working with private bankers, advising high net worth clients on their mortgage matters. As a highly efficient banker, he has won many sales awards during his employment with one of the largest lenders in Singapore. To get a free consultation on your new loan or refinancing needs, please head to www.propwise.sg/mortgage/