Citigroup (NYSE:C) hopes to capture a larger share of the home loan market by helping borrowers pay off their mortgages faster.
Sanjiv Das, the president and chief executive of CitiMortgage, says Citi is offering existing customers in the New York tri-state area the chance to pay off their mortgage more quickly by using the outstanding balance of an existing savings account to reduce the interest paid over the life of their loan.
"This product will significantly move the needle for us on the East Coast," says Das. "It makes the relationship stickier. When the [home] purchase market gets going this will give us a real cutting edge."
The accelerated-payoff mortgage has long been popular in Britain and Australia, where it has been championed by Macquarie Bank, typically uses daily bank "sweeps" from customers' day-to-day savings and checking account balances to pay down mortgage debt.
Citi is using a slightly different model; it is taking the average daily balance in a borrower's savings account and applying a small percentage of it toward the principal balance of the loan.
This week the company officially launched the "Citi Offset Mortgage," a product Das says he first created for Citibank in 1996, and one that remains an anchor product for the bank overseas, particularly in Asia.
"The whole idea behind this is, how can we make all your accounts work towards paying your mortgage down faster - that's a big break through," says Das. "The timing is perfect because of all the customers with negative equity in their homes."
Citi launched a pilot program last year at 19 branches because it had to test the technology, which Das says was no easy feat.
'It's pretty break-through to make your deposit system talk to your mortgage system and because banks are so big in the U.S., we had to figure that out," he says. "That's the reason we did the pilot, we wanted to make sure our systems were robust. It does require a fair amount of plumbing and we've been working on that for some time."
Citi used the example of a customer with a $500,000 mortgage at a 3.75% interest rate with a $50,000 balance in her savings account. To calculate the monthly offset, Citi would take the savings balance, multiply it by the interest rate and then divide the amount by 12. In this example the borrower would receive a monthly offset of $160 and would pay off her mortgage two years faster, saving $32,000 in interest over the term of the loan, Citi says.
For international banks like Macquarie, the core concept typically involves leveraging a customer's existing accounts using daily bank "sweeps," which are common for commercial customers. Typically the average balance in a borrower's savings and checking accounts are subtracted from the loan's principal balance nightly, then "swept" back into the account each morning, effectively lowering the principal and interest payments on the loan.
Bill Westrom, a former account executive at Macquarie, and CEO of Truth in Equity, a Spring Hill, Fla., consulting firm that works with banks to develop similar "equity optimization" programs, says Citi deserves "kudos" for using a personal finance tool that often is reserved for high net-worth individuals.
"Offset accounting is a viable financial methodology that works," says Westrom. "Every bank has the ability to do this."
Still, such programs would not benefit all homeowners; as Citi's example shows, customers would have to maintain sizable balances to realize any meaningful savings.
Citi also caps its program so that the maximum savings account balance eligible for offset is 10% of the unpaid mortgage principal each month. Theoretically, though, a program of this kind would not have any limit and could include a checking account or even a payroll account that would allow the borrower to pay off their mortgage even faster.
Citi also is advising borrowers to consult their tax advisors because the offset credit will result in interest income that has to be filed with the Internal Revenue Service. Though all new mortgage loans are eligible, the program is limited to certain loan products and subject to standard credit guidelines and loan approval.