Mortgage
SCB MortgageOne
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Standard Chartered Bank is a foreign bank that has been operating in Singapore for so long that it is often referred to as a localized foreign bank.
That’s a compliment for the number of years it has served the local communities and businesses with their banking services.
Other than their most popular products such as credit cards and current accounts, home loans have also been something that they are quite involved in.
The MortgageOne home loan package is a typical home loan where borrowers take up a loan to finance the purchase of a house or to refinance one. Only private residential properties are eligible.
It has one unique feature, which is that it enables the borrower to offset the interest charged on their housing loans with interest earned from a special deposit account.
For the special deposit account, two-thirds of the deposit amount will earning the same interest a the interest of the linked mortgage loan, while the remaining one-third will earn 0.25% interest.
For example, on a $100,000 home loan, a borrower might choose to put $30,000 into the deposit account. Of this $30,000, $20,000 (2/3) will earn the same interest rate as the home loan and the remaining $10,000 (1/3) will earn 0.25% ($25).
The scenario above means that if the interest on the $100,000 loan is 1%, then the resulting interest expense paid by the borrower would become $775. Without the Mortgage One facility set up, then the interest payable would be $1,000.
Having the facility allows the borrower to save $225. This is calculated with the equation:
($20,000 x 1%) + ($10,000 x 0.25%).
In effect, with this example, the borrower would earn a total average interest of 0.75% ($225/$30,000).
It must be noted that the monthly amortized payment amount does not change. What changes is that portion of payment that goes towards interest charges and principal repayment.
From the above example, with the reduction in interest charge from $1,000 to $775, it effectively means that the $225 difference goes towards paying off the principal since the monthly payment amount remains the same as scheduled.
In the long run and depending on various factors, this can mean that the borrower fully repays the debt earlier than expected..
The minimum loan amount, as with the majority of lenders in Singapore is $100,000.
The mortgage interest itself consist of an index rate plus a spread (or margin) like most home loans in Singapore with the exception of fixed rate mortgages. Even fixed rate mortgages on the market will eventually convert to a floating rate consisting of an index plus a spread.
At the time of writing this, the indices available are SIBOR and the fixed deposit rate.
Opinion on MortgageOne
Home loans structured with deposit accounts that offset the debt’s interest is nothing new.
It a way for a bank to mitigate their risks of lending to property buyers and homeowners. With the reduced risk, the credit assessment might also have less stringent criteria.
This is because with a customer’s cash kept in the bank, the lender can feel safer that the borrower is not facing any dire financial circumstances that might lead to future delinquency and defaults.
The word “kept” is used in this case as the deposit account is not like a conventional savings account. This is because even though it has interest-earning features like traditional savings accounts, the depositor would never see the interest in cold hard cash as it is channeled to directly offset the interest payment on the mortgage.
It should also be mentioned that SCB’s MortgageOne targets a very specific profile of consumers. Those with spare cash to park in their account and have no plans for them.
This is because borrowers would need to have a huge amount of cash available to place in the special account in order to see any real noticeable reduction in the interest paid when the payment date arrives.
While placing just $1,000 in the account would still enable account owner to offset the interest on the mortgage, the amount will be too minute to to see any real difference.
On the opposite side of the argument, is that why would anyone with extra lump sum cash want to place it in such a facility.
Some people liken it to giving the bank money, and having the funds loaned back to the borrower at a premium.
In the above mentioned example, a customer would be able to save $225 on the home loan interest. But if he puts the money in a time deposit, he might be able to obtain a 1% interest or more. Giving him a gain of $300 or more.
Further more, the STI index has a year-on-year gain of 9.2% for the last 10 years since 2018. On the surface, it definitely looks like a much better alternative than to keep your extra funds with the bank.
But then again, dabbling in the financial markets always carry more risk than keeping money in the bank.
Who would benefit from Mortgage One?
Overall, the MortgageOne loan structure is most suitable for people with extra funds on hand in the short term.
This could be because they are waiting for a time to arrive before using the cash for whatever purposes. Maybe as capital to start a business, to invest in a private company, pay for another house, etc.
Putting the funds in a fixed deposit account might restrict the customer’s ability to withdraw… unless they are willing to incur penalty charges which would make it pointless in the first place.
By keeping the cash in the Mortgageone account when funds are still “free”, these categories of borrowers get to easily offset the interest on their housing loans, and when the time comes to withdraw, they would be able to easily take the cash to somewhere else for their intended purposes.
The process would be hassle-free since the system is setup to make it easy for customers to manage these changes.
Otherwise, if returns on parked funds is the focus, borrowers might find better alternatives elsewhere in fixed deposits, structured deposits, or even in insurance products.
More fine print and terms & conditions of this credit facility by Stanchart can be found here
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