HSBC Bank Canada has launched a mortgage option for homeowners looking to pay down their mortgage faster without having to forego the security and liquidity of maintaining a cash reserve in their savings account.

The new HSBC Smart Savers Mortgage enables homeowners to link their savings accounts to their mortgage and use the balances in these accounts to ‘offset’ or lower the interest rate on the mortgage. As the actual monthly payment remains the same, this feature will allow more of each monthly mortgage payment to be applied directly to paying down the mortgage principal and help the homeowner become mortgage-free faster.

This type of mortgage has already been pioneered by HSBC in several other international markets such as the UK and Hong Kong with great success, HSBC Bank Canada says.

“In times of economic uncertainty many homeowners have traditionally looked for ways to pay down their mortgage more quickly, but have held off because of the competing instinct to hold on to strong cash reserves as a fund for emergencies or other future uses,” says Linda Seymour, senior vp, personal financial services, HSBC Bank Canada. “This new deposit linked HSBC Smart Savers Mortgage will allow them to do both.”

As interest rates charged on mortgages have traditionally been higher than interest rates offered in savings accounts, an additional benefit to users of the HSBC Smart Savers Mortgage program would be that they would in effect be generating an interest “premium” over what they would receive on their regular savings.

For example, a home owner with a HSBC Smart Savers Mortgage with a balance of $300,000 at an annual percentage rate (APR) of 4.59% (for a 5-year fixed term, renewed at the same rate, amortized over 25 years) who links $45,000 in deposits throughout the life of the mortgage, effectively reduces their interest rate to 3.9% APR.

While the monthly payments stay the same throughout the term of the mortgage, more money goes towards the principal. In this example, the amount of deposits equals 15% of the mortgage balance, so the interest rate is reduced by the same 15%. This allows the home to be paid off more than three years faster than with a traditional mortgage and will save nearly $50,000 in interest over the life of the loan.

IE