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.
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.
Offset Mortgages vs Traditional Loans
It’s important to note that there are some downsides to taking out an offset mortgage compared with a traditional home loan. For one thing, offset mortgages tend to come with higher upfront costs than traditional loans due to their complexity and administrative requirements.
Furthermore, since offset mortgages are linked directly with your bank accounts and investments, it may be more difficult to refinance them or switch lenders down the line if necessary—so it’s important to make sure that this is the right choice for you before taking out an offset mortgage.
Further Reading
- Financial innovation and European housing and mortgage markets – academic.oup.com [PDF]
- The baby boom, housing, and financial flows – www.jstor.org [PDF]
- “There’s a Difference—I Own This”: Negotiating Social and Financial Services under Threat of Mortgage Foreclosure – academic.oup.com [PDF]
- Offset mirrors: Institutional paths in Canadian and Australian social housing – www.tandfonline.com [PDF]
- When is mortgage indebtedness a financial burden to British households? A dynamic probit approach – papers.ssrn.com [PDF]
- Elements of mortgage securitization – link.springer.com [PDF]
- ‘Offsetting’Crisis?-Climate Change Cap and Trade Need Not Contribute to Another Financial Meltdown – papers.ssrn.com [PDF]
- Credit availability and economic decisions: Some evidence from the mortgage and housing markets – www.jstor.org [PDF]
- Escrow accounts and the value of mortgage servicing contracts – link.springer.com [PDF]
