HSBC has an interesting new twist on mortgages.  It’s called the Smart Savers Mortgage.

The product has been offered abroad for a while but it just launched in Canada on Tuesday.

It works like this:

1. You get a fixed- or variable-rate mortgage
2. You “link” one or more HSBC chequing or savings accounts to it
3. Any money you keep in those linked accounts reduces your mortgage rate by a percentage that equals your savings divided by your mortgage.

For example, if your mortgage is $200,000 and you maintain $40,000 in savings, HSBC would lower your interest rate by 20%  (i.e.,  $40k / $200k).

At the moment, HSBC’s 5-year fixed rate is 4.59%. A 20% rate reduction means you’d pay 3.76% instead.  Since your payments stay the same, this lowered rate means you’d pay off more principal and cut your amortization by about 3.25 years.

You can reduce your interest rate by up to 50% in this manner.  HSBC VP, Linda Seymour, says it’s the perfect fit for someone wanting to pay down their mortgage but hesitant due to a “competing instinct to hold on to strong cash reserves.”

If you’re interested in this product, it’s available now at HSBC branches.  In addition, company spokesman, Michael Edmonds, says HSBC “will be testing the product with a limited group of brokers over the next few weeks.”

Overall, “interest offsetting” mortgages have been growing in popularity.  One reason is that they offer an enticing no-risk return on liquid cash. Instead of earning 1.50% in a savings account, you can earn a mortgage-equivalent interest rate on your money and pay no taxes on that return.  There are currently half a dozen such mortgages available.

That, in turn, means there are various alternatives to the Smart Savers Mortgage.  One alternative is a readvanceable mortgage.  Readvanceables enable you to re-borrow funds you’ve used to pre-pay your mortgage.  Like the Smart Savers Mortgage, this lets you become mortgage-free faster while still enjoying liquidity.

Or you could also choose an all-in-one mortgage, like National Bank’s All-in-One or Canadian Tire’s One & Only.

The difference is that the Smart Savers mortgage:

• Works by discounting your interest rate…while readvanceable mortgages work by lowering your debt through pre-payments, or reducing the balance used to calculate your interest—in the case of all-in-ones.

(Positive balances in an all-in-one account temporarily reduce your mortgage balance, which means you are charged less interest.)

• Pays interest on your savings.

(Traditional Readvanceable mortgages don’t have savings accounts. In the case of all-in-one accounts, positive funds simply reduce your balance for interest calculation purposes. You do not receive additional interest on these funds.)

• Doesn’t have a line of credit attached
• Has a higher initial interest rate

When compared to the alternatives, the Smart Savers Mortgage has benefits.  The key comes down to its interest rate.  You’ll pay roughly 3/4% more up front for a Smart Savers Mortgage versus a traditional readvanceable mortgage. It can require a lot of savings to overcome that hurdle. Most people don’t leave that kind of cash in savings.

On the other hand, if you’re a risk adverse saver, and have a lot of free cash relative to your mortgage balance, the Smart Savers mortgage is definitely worth considering.  Our hats are off to HSBC for bringing such an innovative product like this to Canada.

______________________________________________________

Quick Tip:  Before deciding on any interest-offsetting (or all-in-one) mortgage, speak with a mortgage planner and have him/her run an amortization comparison between each of the alternatives.

Other Important Details:  In HSBC’s words, the “projected savings is based on the assumption that the deposit balance of the amount illustrated will remain constant for the life of the mortgage.” The interest rate fluctuates and is based on the average daily balance(s) in the linked account(s) during the prior calendar month. Other conditions apply. Speak with a mortgage professional for complete details on this product. All tax or investment advice should be referred to licensed tax and/or financial advisors.

Last modified: April 29, 2014