Deposit Linked Mortgages
In recent years, banks promote various forms of deposit linked mortgage products. One type of deposit linked mortgage product will match the savings interest rate with the mortgage interest rate for part of the deposit the mortgage applicant deposits with the bank.
For instance, if you apply for a 2 million mortgage loan at a mortgage interest rate of 2.15% p.a., the applicant can deposit up to 1 million with the bank which will yield the same savings interest rate of 2.15% p.a.
There are slight differences in structures among different deposit linked products. Customers shall check carefully as to the different features for different products.
Another more complicated product is that the deposit you maintain will be offset against the principal under the mortgage loan which is non-interest yielding. For example, if you apply for a 2 million mortgage loan but deposit 1 million with the bank, 50% of your mortgage loan principal will not attract any savings interest, which is like an interest free pledge of deposit with the bank. On the monthly installments made, a larger portion will be used to repay and reduce the principal outstanding, this also cuts down the interest because of a shrinking principal. This method will accelerate amortization of the whole mortgage loan.
The first method depicted above has higher interest expense and may be more suitable for taxpayers wishing to claim deduction on mortgage loan interest payments while the second method will speed up repayment and saves overall interest.
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