Most of us will not have so much idle funds to do a scenario C where one could effectively pay down the loan in full. But many would have some kind of rainy-day funds in cash. Reducing Interest Costs Without Doing Actual Prepayment When choosing a floating rate over fixed, one does not have to lose control totally even with rising interest rates as interest costs can be lowered by parking idle funds into the SmartMorgtgage account as we have seen in scenario B above (placing $200,000 deposit reduces the interest cost to $933 in the 1 stinstalment which is exactly how much interest will be charged when the same loan of $700,000 is signed at 1.60%, instead of 2%) 2. On one hand, there is reluctance to sign for fixed rate at such high levels unseen in Singapore for the past decade lest one ends up with a lemon should global recession hits and rates come tumbling down on the other hand, there is fear of runaway interest rates if left unhedged with a fixed rate home loan.Īn interest offset loan becomes a very useful mitigating tool at one’s disposal in such a situation. Added Assurance When Choosing Floating Rate Over Fixed Rate Home LoanĪs the gap between the lowest floating rate (currently at 2%) and the lowest fixed rate (currently at 2.48% for private properties) widens significantly in recent months, more homeowners are caught between a rock and a hard place. We will look at four key benefits of an interest offset loan with HSBC’s SmartMortgage? 1. Now one wonders why would someone with idle funds of $700,000 still need to take up a home loan of $700,000 with the bank? That depends on one’s objective. Tan deposits $1m idle funds into SmartMortgage, his mortgage interest offset remains the same as the bank has capped the maximum offset at 70% of the outstanding loan, ie. Tan deposits the equivalent amount to his loan of $700,000 idle funds into SmartMortgage? That would be scenario C where his interest component is further reduced to $349 which effectively means he is paying only 0.60% on his home loan. In scenario B when he deposits $200,000 of his idle funds into his SmartMortgage account, he reduces this interest costs by 20% from $1,167 to $933 which has the same effect of reducing his mortgage interest rate by 20% from 2% to 1.6%. In scenario A where there is no interest offset current account, he would be paying approximately 40% of that as interest to the bank. Tan still pays the same mortgage repayment every month of $2,967. Notice how the interest earned on the qualifying deposits is now used to “offset’ against the interest component in the monthly repayment so that more of it goes towards reducing the principal loan. Tan deposit $200,000, $700,000 (equivalent amount to his loan) or even $1,000,000 into his SmartMortgage current account. Tan just refinanced an outstanding loan of $700,000 to HSBC on a 25-year tenure that comes with the SmartMortgage current accout and below is a summary of the offseting effect should Mr. Let’s take it look at how it works by way of an example. We like to introduce HSBC’s SmartMortgage, with one of the highest qualifying deposits ratio of 70%, amongst the three banks with interest offset accounts in Singapore (StanChart at 67% and Citibank at 50%). The interest earned on the qualifying deposit amounts every month is then used to “offset” against the interest charged on the mortgage loan hence resulting in the borrower reducing his loan more repaidly than otherwise. An interest offset mortgage loan is one where the bank provides concurrently a current account that pays the borrower back the same deposit interest rate as the mortgage rate charged, for up to a certain percentage of the amounts deposited with a cap set based on the outstanding mortgage loan at any point in time.
0 Comments
Leave a Reply. |
AuthorWrite something about yourself. No need to be fancy, just an overview. ArchivesCategories |