Offset Mortgages Popular Elsewhere, but Here?

Orla O’Sullivan
August, 2005
ABA Banking Journal

Following are excerpts taken from the August, 2005 edition of ABA Banking Journal.

A mortgage that seems to let borrowers “have their cake and eat it” is growing in popularity worldwide.

Variously known as “offset” or “single” account or “current account” mortgage, it reduces the amount owed on a consumer’s mortgage by the amounts sitting in her back accounts at any point in time. For example, a bank customer with a $300,000 mortgage loan and $20,000 in checking will pay mortgage interest on just $280,000. If her mortgage interest rate is 3%, you could say she is saved from paying out $600 a year, or, looked at the other way, she is effectively getting 3% interest on her checking account.

First introduced in Australia in the early 1990s, it is now the standard mortgage there and, more recently, in Ireland.

Some consumer advocates have questioned whether offsets are more than a gimmick, since lenders don’t offer their best rates on them. NIB’s best deal earlier this year was a 2.79% “tracker,” which tracks European Central Bank rates, whereas its offset rates ranged from 2.99% to 3.19%, depending on loan to value. Saving about 3% a month on about $10,000 in savings and checking means less than paying an extra 0.4% on a $400,000 home loan.

Nonetheless, Glatha Madden, executive vice-president and managing director of revenue enhancement with Carreker Corp., says, “I tend to think these mortgages are a better deal for the consumer than for the bank.”

Madden added that she had encountered offset mortgages while consulting with banks in South Africa, Australia, and the U.K. She doesn’t rule out their spreading to the U.S., but says, “There’s not a huge likelihood of that happening very quickly.”

One catalyst would be the shifting of the U.S. market from its still heavy emphasis on fixed-rate loans. Lenders are more inclined to sell off fixed-rate than adjustable-rate mortgages, she explains, and the practicalities of trying to link bank accounts to mortgages sold to a third party are off-putting.

Still a fundamental difference remains in how consumers view their mortgages in the U.S. versus elsewhere. With all mortgage interest tax deductible in the U.S., consumers have an incentive to prolong the life of their loan. With mortgage interest rates now so low, spare funds are likely to yield more in an investment account than the 3% or so to be saved by way of a mortgage interest credit for bank account balances, according to Madden.

O’Driscoll says offset mortgage customers can maximize their gains by ensuring that all payments are scheduled to go out as far as possible after the date their salary is mandated into their accounts, since interest accrues daily.