What is a mortgage offset account?

A mortgage offset account is a savings or current account linked to your home loan that reduces the amount of interest you pay on your mortgage. The balance in the offset account is deducted from your outstanding loan balance for the purpose of interest calculation, effectively reducing the interest charged each month.

For example, if your outstanding mortgage is S$500,000 and you have S$50,000 in your offset account, interest is only calculated on S$450,000. At a mortgage rate of 3%, the annual interest saving from the S$50,000 offset balance is approximately S$1,500.

The money in the offset account remains accessible - you can deposit and withdraw funds as needed, making it a flexible way to reduce interest costs without committing to formal prepayments. This is particularly useful for borrowers who want to maintain liquidity while still benefiting from reduced interest charges.

Mortgage offset accounts are not widely available in Singapore and are more common in markets such as Australia and the UK. Among the limited number of lenders that do offer this feature, terms vary. Some provide a full offset where the entire account balance offsets the mortgage, while others cap the offset at a certain percentage of the outstanding loan. The linked account typically earns little or no deposit interest, as the benefit is derived from the mortgage interest reduction instead.

The offset account is most beneficial for borrowers with significant cash reserves they want to keep liquid rather than locking into formal prepayments. It is also advantageous during lock-in periods when partial repayments may be restricted or penalised, as the offset mechanism achieves a similar interest-saving effect without triggering penalties.

When comparing mortgage packages, a loan with a slightly higher rate but a full offset facility can sometimes be more cost-effective than a lower-rate loan without one, depending on the balance you maintain in the offset account.

Cashew can identify which lenders offer offset accounts and model whether this feature would deliver meaningful savings based on your expected cash balances.