Mortgage acceleration

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Mortgage acceleration is a term given to the practice of paying off a mortgage loan faster than required by terms of the mortgage agreement. As interest on mortgages is compounded, early payments diminish the period needed off pay off the mortgage, and avoid a quotient of compounded interest.

A commonplace method of mortgage acceleration is a so-called bi-weekly payment plan, in which half of the normal calendar monthly payment is made every two weeks, so that 13/12 of the yearly amount due is paid per annum. Commonplace too, is the practice of making ad hoc additional payments. The agreements associated with certain mortgages preclude or penalize early payments.

However, another type of mortgage acceleration concept appears to have been embraced by a variety of financial institutions and intermediaries, which offer products such as methods, software, mortgage-linked checking accounts, and home equity line of credit loan facilities advertised as being capable of assisting in achieving mortgage acceleration, and available at a range of premiums.

Most of these “mortgage acceleration” (also called “mortgage reduction”, “interest reduction” or “debt reduction”) programs or software are based on a trick.

The basic claim made is that by using a particular type of loan in a particular way (often following a “program”), the borrower can cut many years off the mortgage without making additional repayments – or similarly, that although additional payments are made, the savings increase significantly due to the use of a particular loan and/or strategy.

The concept usually involves a type of loan that allows the borrower to use the loan as their day-to-day transaction account. This loan may refinance the entire mortgage, be in addition to the mortgage (requiring regular transfers to the mortgage) or in some cases involves an “offset” account, that sits separately to the mortgage but offsets interest on any deposit against the mortgage interest.

Promoters can profit from the sale of software, providing “monitoring” or “support”, or from commissions from referrals to lenders. Examples are usually presented that show huge savings on the mortgage. These examples may be based on the borrower’s estimate of their regular expenditure, or on an “example” family. An underestimate of real expenditure (by the promoter or the borrower) leaves additional amounts in the mortgage (or related account) in the example, and the example therefore shows significant savings. However, the presentations represent that the savings are primarily due to the type of loan account and the way it is being used.

In theory, savings could be made by leaving funds that would otherwise be in a transaction or check account for bills and living expenses, in a mortgage or related account. For example, if a borrower had an average of $4,000 for example, sitting in a check account, leaving this in their mortgage or related account could save about $280 per year on a 7% mortgage - or less than $6 per week .

Even $6 per week can make a difference to a mortgage in the long term, but there are almost always some costs involved in setting up the “program” and these will usually exceed the savings. Costs may include fees and interest incurred in relation to a separate line of credit loan, or in refinancing a mortgage. Interest and/or monthly fees on the new mortgage may be higher than on the old mortgage. The cost of software to “monitor” the program, or fees paid to set the program up will also reduce the meager savings that can be made.

While some promoters refer to the Australian experience, this type of marketing has all but ceased in Australia since the Australian regulator, the Australian Securities and Investments Commission (ASIC) took action to stop a range of brokers and software developers from making the above representations. [1] [2] [3] [4]

This type of program is like any financial tool. It will work for those savvy enough to harness it's powers. There is a HUGE difference between adding $6 per week and a program that tracks monthly expenses and advises how much additional principal will be saved by a certain payment.