Definition

The term flexible mortgage refers to a residential mortgage loan that offers flexibility in the requirements to make monthly repayments. The flexible mortgage first appeared in Australia in the early 1990s, however it did not gain popularity until the late 1990s. This technique gained popularity in the US and UK recently due to the United States housing bubble.

Home Ownership by Country

What is 'Offset Mortgage'

A type of mortgage that involves blending a traditional mortgage with one or more deposit accounts; the savings balance(s) held in the latter can be used to offset the mortgage balance. Both the account and the loan are held at the same banking institution, and an initial loan balance (or credit limit) is established, along with an interest rate. The savings account is typically a non-interest bearing account, allowing the bank to earn a positive return on any balances in the account.

When each mortgage payment is made, the interest is calculated on the principal remaining in the mortgage account, minus the aggregate amount of savings in the one or more deposit accounts. Borrowers still have access to their savings; if money is removed from savings during the month, the next mortgage payment will be calculated on a higher principal balance.

For example, if the mortgage principal is $225,000 and $15,000 was held in savings during the last month, the interest due would only be calculated on ($225 – $15) = $210,000.

Explaining 'Offset Mortgage'

This is a very attractive option for people that can be diligent savers - even though the savings account won't earn any interest, they are typically low-earning accounts that only pay 1-3% per year. Chances are that the interest rate on the mortgage is substantially higher, so any savings there is a net benefit to the borrower. Meanwhile, the foregone interest on the savings account becomes non-taxable payments towards the mortgage.

Offset mortgages are common in many foreign nations, such as the U.K., but are currently not eligible for use in the U.S. because of tax laws.

Further Reading

Financial innovation and European housing and mortgage markets
academic.oup.com [PDF]
… David Miles, Vladimir Pillonca, Financial innovation and European housing and mortgage markets, Oxford Review of … Twitter; Facebook; More. Navbar Search Filter This issue All Oxford Review of Economic Policy JEL: D14 - Household Saving; Personal Finance JEL: E44 …

The baby boom, housing, and financial flows
www.jstor.org [PDF]
… David Miles, Vladimir Pillonca, Financial innovation and European housing and mortgage markets, Oxford Review of … Twitter; Facebook; More. Navbar Search Filter This issue All Oxford Review of Economic Policy JEL: D14 - Household Saving; Personal Finance JEL: E44 …

“There's a Difference—I Own This”: Negotiating Social and Financial Services under Threat of Mortgage Foreclosure
academic.oup.com [PDF]
… David Miles, Vladimir Pillonca, Financial innovation and European housing and mortgage markets, Oxford Review of … Twitter; Facebook; More. Navbar Search Filter This issue All Oxford Review of Economic Policy JEL: D14 - Household Saving; Personal Finance JEL: E44 …

Offset mirrors: Institutional paths in Canadian and Australian social housing
www.tandfonline.com [PDF]
… David Miles, Vladimir Pillonca, Financial innovation and European housing and mortgage markets, Oxford Review of … Twitter; Facebook; More. Navbar Search Filter This issue All Oxford Review of Economic Policy JEL: D14 - Household Saving; Personal Finance JEL: E44 …

When is mortgage indebtedness a financial burden to British households? A dynamic probit approach
papers.ssrn.com [PDF]
… David Miles, Vladimir Pillonca, Financial innovation and European housing and mortgage markets, Oxford Review of … Twitter; Facebook; More. Navbar Search Filter This issue All Oxford Review of Economic Policy JEL: D14 - Household Saving; Personal Finance JEL: E44 …

Elements of mortgage securitization
link.springer.com [PDF]
… David Miles, Vladimir Pillonca, Financial innovation and European housing and mortgage markets, Oxford Review of … Twitter; Facebook; More. Navbar Search Filter This issue All Oxford Review of Economic Policy JEL: D14 - Household Saving; Personal Finance JEL: E44 …

'Offsetting'Crisis?-Climate Change Cap and Trade Need Not Contribute to Another Financial Meltdown
papers.ssrn.com [PDF]
… David Miles, Vladimir Pillonca, Financial innovation and European housing and mortgage markets, Oxford Review of … Twitter; Facebook; More. Navbar Search Filter This issue All Oxford Review of Economic Policy JEL: D14 - Household Saving; Personal Finance JEL: E44 …

Credit availability and economic decisions: Some evidence from the mortgage and housing markets
www.jstor.org [PDF]
… David Miles, Vladimir Pillonca, Financial innovation and European housing and mortgage markets, Oxford Review of … Twitter; Facebook; More. Navbar Search Filter This issue All Oxford Review of Economic Policy JEL: D14 - Household Saving; Personal Finance JEL: E44 …

Escrow accounts and the value of mortgage servicing contracts
link.springer.com [PDF]
… David Miles, Vladimir Pillonca, Financial innovation and European housing and mortgage markets, Oxford Review of … Twitter; Facebook; More. Navbar Search Filter This issue All Oxford Review of Economic Policy JEL: D14 - Household Saving; Personal Finance JEL: E44 …