New mortgage deals: 'Offset' loans

(Money Magazine) -- Question: I've heard that American lenders are now offering something called an offset mortgage, which is popular in the U.K. Do you think this is a good deal? - Jeffrey S. Kallas, Columbus, Ohio

Answer: It depends. Here's how it works in Britain. You get a mortgage linked to a non-interest-bearing savings account whose deposits "offset" your loan balance.

So if you owe $200,000 on your home but have $50,000 on deposit, the bank calculates your monthly interest as if you borrowed only $150,000.

The bank gets its back scratched by getting to use your deposit interest-free. You pay off your mortgage faster because more of your monthly payment is applied to principal - and you can get your hands on your savings any old time.

Because this deal would give you an extra weensy tax break under U.S. law, however, no offset mortgages are allowed here.

But two U.S. companies - CMG Financial Services and Macquarie Mortgages USA - have introduced a version that passes muster with the IRS.

You take out an adjustable-rate mortgage and deposit your paycheck into the mortgage account. Doing that gives you an offset on the principal, which lowers your interest.

The arrangement could be useful if you receive big bonuses; you'll be reducing your interest until you use the money. But here's the real benefit: If you manage not to spend all your pay, you cut your costs.

Say you save 5 percent of take-home pay of a gross income of $150,000 - about $460 a month. On a $300,000 7 percent mortgage, you'd slash your interest by $197,300 and be paid off in only 18 years - and you'd still have the money you saved.

But if you spend more than you put in, the difference adds to your loan balance.