Using an interest-offset account to save on mortgage

Posted by Lynette Tan on December 18, 2017

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Most people set about searching for a mortgage loan by looking at the lowest interest rate available in the market. Or perhaps, they use the bank that they are familiar with. Since there are so many types of home loans available, banks are forced to innovate and come up with interesting products that can sometimes benefit consumers like yourself.

 

A mortgage interest-offset account is just that. When used wisely, a mortgage interest-offset account can help you save on your mortgage repayments over the long term.

 

How an interest-offset account works

An Interest-Offset mortgage account acts like a savings/repayment account that is linked to your mortgage loan. The difference between this type of account compared to a normal bank saving’s account is that it rewards you with interest rates that match your housing loan rate.

Of course, you can’t expect the account to reward you with 2% interest if your home loan rate is 2% as well. Depending on the bank that offers the account, the matching interest rate may only apply to a percentage of your full deposit amount.

Let us look at an example of how one such account works:

 

Standard Chartered MortgageOne SIBOR

Let’s say you take up a loan of $600,000 at 1.5% interest. Your loan payment interest will come up to $9,000.

You deposit $250,000 of cash into the MortgageOne account, which gives you the same 1.5% interest on 2/3 of your deposit amount - $2,500

The remaining 1/3 of your deposit get to earn 0.25% interest - $208

Total interest savings - $2,708.

 

 

What are the benefits of using an interest-offset account?

 

  • Definite interest savings

 

By giving you interest offset, you actually get to gain quite a bit of interest savings over time, which reduces the overall amount you pay for your property.

 

  • Higher interest compared to normal savings account

 

Some borrowers may feel that the interest savings from an offset account only becomes substantial if you have a large amount of cash that you can deposit. While this is not wrong, you still get a higher interest payment from an offset account compared to a normal savings account.

Although there are now several types of bank savings accounts that allow you to earn up to 3% interest, they have several conditions that you need to fulfil every month – salary deposits, minimum spending on credit cards and minimum qualifying transactions. This can be a headache to track. If you do not fulfil ALL the requirements, the interest you get reverts to the basic low rate of about 0.1%. With a mortgage interest-offset account, you have none of these requirements to track every month.

 

  • Funds remain liquid

 

Most importantly, your funds are not locked-in with these interest-offset accounts. In fact, if you compare the interest you get from these accounts, they may even be a better deal compared to a fixed deposit account.

 

  • Hedge against higher interest

 

The biggest fear of borrowers is a sudden increase in interest rate. This typically happens when you choose a floating rate while you are still within the locked-in period, reducing your likelihood to refinance. With an offset account, a higher loan rate simply translates to higher interest payments to your account, providing you with an effective hedge against sudden interest rate movement. 

The benefits of using an interest-offset account can be substantial, especially for those who are cash-rich and leaving their money in a low-interest generating account. Do note that different offset accounts have their particularity and may not work in the same manner. Need more information on which interest-offset account to choose? We can help!

 

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Topics: Home-buying

Written by Lynette Tan

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