What is a Mortgage Accelerator?
A mortgage accelerator is a type of checking account that allows a borrower to repay a mortgage more quickly using the balance of monthly paychecks as opposed to recurring monthly payments.
How Does a Mortgage Accelerator Work?
Common in the United Kingdom and Australia, a mortgage accelerator is a checking account connected directly to a mortgage account. Borrowers direct deposit their salaries into the checking accounts. Initially, the bank applies the full salary to the mortgage balance. The bank then increases the amount due on the mortgage by the total of all checks and withdrawals written on the checking account during the month. At the end of each month, the bank reduces the principal balance of the mortgage by the amount leftover.
For example, suppose Bob has a mortgage accelerator with his lender, Bank ABC. On January 5, Bob's employer deposits Bob’s salary of $3,000 into his checking account. Bank ABC subsequently reduces Bob’s outstanding mortgage balance from $153,000 to $150,000. By January 30, Bob has written checks from his account in the amount of $1,500. Bank ABC readjusts the mortgage balance from $150,000 to $151,500. On January 31, bank ABC debits the $1,500 remaining in Bob’s checking account. This leaves Bob with a $151,500 mortgage balance (down from $153,000 at the beginning of the month) until his employer deposits his next salary in February.
Why Does a Mortgage Accelerator Matter?
As opposed to amortized payments by check for a fixed term, a mortgage accelerator allows the borrower to make much larger payments and settle the total mortgage faster. It is important that borrowers understand that banks charge higher interest for mortgage accelerators than for traditional mortgages. It is also important not to confuse a mortgage accelerator with a mortgage acceleration clause, which is a provision in a traditional mortgage that allows the lending bank to call the entire mortgage balance at once in certain contexts.
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