Mortgage Accelerator

What is 'Mortgage Accelerator'

Mortgage accelerator is type of mortgage loan program popular in the United Kingdom and Australia that resembles the combination of a home equity loan and a checking account. Borrowers' paychecks are deposited directly into the mortgage account, and the mortgage balance is reduced by that amount. Then, 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 Any amount deposited in the account that is not withdrawn through the check writing process is applied to the balance of the mortgage at the end of the month as repayment of the loan’s principal.

Mortgage accelerator loans were first marketed in the United States during the mid-2000s. While their popularity has been increasing in the U.S., they are much more widely used in Australia, where roughly one in three mortgages is a mortgage accelerator loan.

BREAKING DOWN 'Mortgage Accelerator'

A mortgage accelerator loan is very different from a traditional 30-year fixed-rate mortgage. In a mortgage accelerator program, homebuyers receive a variable-rate home equity line of credit (HELOC) instead of a fixed-rate loan for their first mortgage. Many lenders offer the accelerator for new home purchases as well as for refinancing an existing mortgage.

Mortgage accelerator loan programs have a number of potential benefits.  One of their most attractive features is that when a borrower’s paycheck is deposited into the account, it reduces the average monthly outstanding principal balance of the mortgage on which interest is charged, even if that principal balance at the end of the month is equal to what it was at the beginning of the month.

Another plus is that interest accrues daily under the plan. Additionally, the amount of the paycheck that remains in the account at the end of the month might be larger than what would be paid toward the principal balance of the mortgage under a traditional amortizing mortgage. When this is the case, principal is retired early, reducing the entire term of the mortgage and resulting in interest savings.

Potential Drawbacks of Mortgage Accelerator Loans

Mortgage accelerator loans are generally most appropriate for borrowers who consistently have more money coming in than going out. Borrowers who have negative cash flows would continuously be adding to their mortgage debt. One potential drawback of the mortgage accelerator loan program is that it might carry a higher interest rate than a traditional mortgage. This is especially true in a rising rate environment, because this type of loans have a variable rate. Also, a holder of a traditional mortgage can accomplish the same early retirement of principal as in a mortgage accelerator program, thereby shortening the life of the mortgage and realizing interest savings by making unscheduled principal payments on the traditional amortizing mortgage.