Offset financing allows accountholders to use extra income to pay down their mortgage sooner and reduce net interest payments over the life of the loan. But it’s the right instrument for only certain borrowers.
For the right person or family, offset financing for a home mortgage might make sense. But who is this person or family? And what are the pros and cons of these instruments?
Offset financing combines a personal banking account and mortgage financing in one instrument to potentially:
- Accelerate the rate at which a mortgage is paid off
- Reduce the total amount of interest paid
How it works
Generally, a borrower sets up an account to make mortgage payments. Regular deposits to the account lower a loan’s daily principal on which monthly interest payments are calculated. Instead of receiving interest on the balance of the account, interest is paid based on the net balance of the loan minus the balance in the account; the lower the account balance, the less interest is paid.
Since an offset account functions like a checking account, money can be used to pay non-mortgage expenses at any time. Cash balances that exceed expenses each month remain in the account, lowering the balance for longer. In this way, borrowers that make regular deposits to the account automatically pay off the loan faster because mortgage payments are calculated on the full amount of the loan. Interest is calculated nightly so the lower the principal balance, the lower the daily interest fees for the month.
So, who wins? Lenders usually charge a higher interest rate on offset loans than more traditional loan so accountholders will want to carry large enough cash balances to see their net interest expense reduced.
To this end, John Klaess with CMG Financial says, “Borrowers with great repayment history, positive monthly cash-flow and a low debt-to-income ratio make great candidates for this type of loan.” Conversely, borrowers with expenses nearly equal to their income are least suitable for these instruments.
Borrowers should consider when they might expect to pay-off their mortgage before locking in this instrument. Typically, there is no early pay-off fee or pre-payment penalty for paying off these loans early. However, if an accountholder has enough cash on hand to permanently pay down a mortgage, the borrower may be better off with a more traditional mortgage that doesn’t rely on net interest savings month-to-month to offset the higher, variable interest mortgage.
Offset financing accounts are only available for properties in 21 states, including AK, AZ, CA, CO, FL, GA, IA, ID, IL, IN, MI, MO, MN, NY, OR, SC, TN, UT, VA, WA, and WI (CMG).
If you are looking for mortgage repayment flexibility, let’s sit down and talk about offset financing. Contact us today!
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