By: Zeng Han Jun, CPCG, Singapore

Offset mortgages have been around for a few years in the Singapore home loan scene and has been relatively popular with people who knows who to make use of such instrument to offset their interest. An offset mortgage allows a home owner to offset any interest with the cash deposit in their savings or current account. The main factor of this instrument is, with an offset mortgage, the savings or current account that goes with it earns a relatively higher interest rate than normal accounts. The interest earns offsets the interest you have to pay for your home loan.

For example, if you are having a home loan of $1,000,000 at 5%. With a 100% offset mortgage, you will be given a savings or current account that earns you 5% interest on the deposit. If you were to place $1,000,000 as deposit, you virtually do not pay any interest for your home loan at all. This allows you to save dramatically from your home loan. Some people will think that why they should place it as a deposit when they can just pay off the home loan entirely. That is because this instrument keeps you liquid, allowing you make use of any investment opportunities that has the potential to hit above a 5% return immediately.

Pros of an Offset Mortgage

1) A flexible instrument that normally allows you to do pre payments.
2) Interest offered for savings and current account is relatively very attractive, compared to many other types of financial instrument.
3) Especially advantageous for those who are able to pay off for a property in its entirety or able to save large amount of money.

Cons of an Offset Mortgage

1) An offset mortgage allows you to draw out your funds freely and it is definitely not for the undisciplined investors/ savers.
2) These mortgages are normally only effective if you placed about 10% to 20% of your funds into the savings and current account. Of course the more the merrier, but every offset mortgage has a cap as to how much of your funds can earn a high interest rate.
3) Variety of offset mortgages is not many and only a few banks offer it.
4) You definitely have to use the savings or current account that your home loan is tied to, which effectively ties you to their product.

There are numerous home loan products out there for you to choose from and an offset mortgage is definitely one to consider if you are thinking of paying off your property purchase in full. Planning properly and choosing the right product is the key to preserving your wealth in the long run.

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