What Is a CMG Plan?
A CMG plan is a type of hybrid mortgage plan in which a borrower's mortgage loan is structured as a checking or savings account within the same bank. The savings balance held in the account can be used to lower the principal of the mortgage balance. For example, paychecks are deposited directly into the mortgage account, and that amount reduces the mortgage balance.
As checks are written against the account during the month, the mortgage balance rises. Any amount deposited in the account that is not withdrawn through the check-writing process is applied to the mortgage balance at the end of the month as repayment of principal. This type of plan is not eligible in the U.S. due to tax laws but is used abroad in countries like the United Kingdom.
These are also known as offset mortgage plans, which are not eligible in the U.S., either.
- Buyers in the U.S. cannot use CMG mortgage plans due to tax laws.
- CMGs are also called offset mortgage plans.
- The benefit of a CMG plan is the ability to reduce the amount of principal of the mortgage.
- The plan assumes that a minimum of 10% of each deposit remains in the account each month.
- Using this type of mortgage, it is possible to make smaller payments towards the loan principal rather than one large payment (done with a conventional mortgage) each month that primarily pays the interest on the loan.
How a CMG Plan Works
There are potential benefits of the CMG mortgage plan. First, when the paycheck or other deposit is deposited in the account, it reduces the mortgage's average monthly outstanding principal balance. When the outstanding principal balance goes down, it may reduce the interest charged.
American buyers in the U.S. can select from conventional 30- and 15-year mortgages and others, but CMG (aka offset mortgages) plans cannot be used.
Advantages and Disadvantages of a CMG Plan
Interest accrues daily under this type of plan. So, even if that principal balance at the end of the month is equal to what it was at the beginning of the month, you have paid off interest.
The plan also assumes that a minimum of 10% of the paycheck remains in the account at the end of the month to reduce the mortgage's principal balance permanently. A 10% rate of savings results in a more significant monthly reduction of principal than is required under a traditional 30-year amortizing mortgage. As a result, the mortgage term is substantially shorter, and additional interest charges are saved.
The potential drawbacks of the CMG mortgage plan are that it might carry a higher interest rate than more traditional mortgages and that a borrower can accomplish the same early retirement of principal by making unscheduled principal payments on a conventional amortizing mortgage.
American homeowners can pay an extra payment towards their mortgage's principal balance, but for buyers in the U.S., CMG plans are a non-starter, as the IRS doesn't allow them due to tax laws.