A guaranteed mortgage is a type of mortgage that allows the borrower to pay a lower interest rate on the mortgage if they deposit savings with the same financial institution. The amount of savings is deducted from the mortgage balance, reducing the total amount the borrower will pay in interest.
Definition and Examples of a Guaranteed Mortgage
A guaranteed mortgage is a type of mortgage that allows borrowers to use their own savings to offset the amount (original principal balance) on which interest is calculated in the mortgage deed. The “offset” is achieved by deducting the amount you have in savings from the original principal balance of the mortgage. The remaining amount is what interest is calculated on, rather than the actual original balance of the mortgage.
The guaranteed mortgage can be expressed by the following formula:
Mortgage Balance – Savings Amount = Guaranteed Mortgage Amount
For example, the guaranteed mortgage amount would be $280,000 if you had a mortgage of $300,000 and deposited $20,000 in savings ($300,000 – $20,000 = $280,000).
Impact on the Loan:
Calculating interest on a mortgage of $300,000 at a rate of 3% would result in a monthly payment of $1,264. If the same mortgage is offset by $20,000 in savings (bringing it down to $280,000), the interest calculation would result in a monthly payment of $1,180. This means a savings of $84 per month, $1,008 annually, and $30,240 over 30 years.
Note: Savings typically must be deposited with the same financial institution, and your mortgage must qualify for the offset.
By linking your accounts, you will lower the amount you pay in interest on your mortgage instead of earning interest on the amount deposited in your savings account. Saving on interest means you could have a lower payment and perhaps even pay off your mortgage faster as a result. The more you deposit in savings, the less interest you will pay on the mortgage.
Depositing savings does not reduce the mortgage balance. The bank will deduct the amount in savings from the mortgage deed and charge interest only on the remaining amount, but you will still owe the original amount of the principal.
Alternative names: Comprehensive mortgage, Money merger account
How Does a Guaranteed Mortgage Work?
You can obtain a guaranteed mortgage in two ways:
Borrowers who already own their homes can check with the lender to see if their mortgage is eligible for offset. Borrowers usually need to have an adjustable-rate mortgage to link to a savings account. They must wait until the term ends if they have a fixed-rate loan. They can refinance to an adjustable-rate mortgage eligible for the offset thereafter.
New borrowers can set up a guaranteed mortgage from the start with a lender of their choice.
Note: Borrowers can link multiple accounts for increased offset. The higher the daily average balance, the more savings on interest.
Banks compare the offset account with a savings account linked to a Home Equity Line of Credit (HELOC) connected to the original mortgage. It reduces the principal on the mortgage when funds are deposited into the account. The bank calculates interest daily based on the lower capital. Like a HELOC, funds can be withdrawn at any time and for any purpose. However, the interest fees may be higher when withdrawing, and there will be a lower amount in the account to offset the mortgage.
Do I Need a Guaranteed Mortgage?
If you have a savings account, it may make sense to link it to a guaranteed mortgage. You may also want to consider a guaranteed mortgage if you wish to apply savings to the principal balance of your mortgage while keeping access to the funds.
Savings
The deposit in a collateralized mortgage will not earn interest. Most borrowers do not feel disappointed by losing a few cents or dollars in interest when they save much larger amounts by offsetting their mortgage.
Note: You can enter your numbers into Barclays’ offset mortgage calculator to find out how much you will save with an offset mortgage.
Alternatives to the Offset Mortgage
The comprehensive mortgage or cash pooling account in the United States is similar to the concept of the offset mortgage in the UK, but there are some key differences.
Both offset mortgages and comprehensive mortgages or cash pooling accounts reduce the amount owed as interest by keeping the savings balance high in an “offset” account. The comprehensive mortgage is unique in that it is considered a credit line mortgage in first position.
Offset Mortgage vs. Traditional Mortgage
An offset mortgage differs from a traditional mortgage in several ways:
| Traditional Mortgage | Offset Mortgage |
|---|---|
| Independent mortgage | Must be linked to a savings account, usually with the same financial institution |
| No linked savings account | Linked savings account |
| Interest paid on the full balance | Interest paid on the balance after deducting the amount deposited in the savings account |
| Earns interest on the savings account | Does not earn interest on the savings account |
| Can have a fixed or variable interest rate | Typically used with variable rate loans only |
Advantages and Disadvantages of Offset Mortgages
Advantages
- Your payment can be lower
- You can pay off the mortgage faster
- Immediate access to savings
- You may be able to access excess payment funds or take a paid holiday
Disadvantages
- Interest rates may be higher
- Monthly, annual, or upfront fees may apply
- Usually only available on variable rate loans
- Few lenders in the United States to choose from
Explained advantages:
- Your payment can be lower: Interest is calculated on the offset balance from the amount deposited in savings, so your mortgage payment can be lower as a result. The more you deposit in savings, the less interest you pay and thus the lower the payment.
- You can pay off the mortgage faster: Borrowers can use the savings from interest reductions to make extra payments, leading to paying off the mortgage in less time than the original loan’s due date.
- Immediate access to savings: You should have immediate access to your savings as it does not apply to the principal. This allows borrowers to access their savings immediately while applying the amount toward the principal to reduce the interest charged on the mortgage.
- You may be able to access excess payment funds or take a paid holiday: Your bank may allow you to re-use those funds if you made an extra payment on your offset mortgage. You may also have the option to take a break from payments if you overpaid on your mortgage.
Explained disadvantages:
- Interest rates may be higher: An offset mortgage is at a variable rate, so you may have to pay a higher interest rate.
- Monthly, annual, or upfront fees may apply: You might have to pay monthly or annual fees for the offset account. Comprehensive mortgages or cash pooling accounts may charge upfront fees typically, making it hard to justify the cost.
- Usually only available on variable rate loans: You will have to wait until your term ends to switch from a fixed-rate loan to a variable-rate loan to use the offset mortgage product.
- Few lenders in the United States to choose from: Offset mortgages are more common in the UK, Australia, and New Zealand than in the U.S. U.S. lenders offering similar products call them “comprehensive mortgages” or “cash pooling accounts.” These are essentially first-position HELOCs rather than mortgages tied to savings accounts.
Taking
samples from the source:
- Barclays. “The Offset Mortgage.” Accessed October 8, 2021.
- Yorkshire Building Society. “The Offset Mortgage.” Accessed October 8, 2021.
- CMG Financial. “The Comprehensive Loan.” Accessed October 8, 2021.
Source: https://www.thebalancemoney.com/what-is-an-offset-mortgage-5204907
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