CMG-Plan

What is a CMG plan?

A CMG plan was a hybrid mortgage plan introduced in the United States by CMG Financial in the mid-2000s that uses a checking account to reduce the mortgage amount, allowing the borrower to pay less interest each month. The savings held in the account can be used to reduce the principal of the mortgage balance. The CMG plan has since been rebranded All-in-One Mortgages, with other lenders also offering the loans.

THE CENTRAL THESIS

• The CMG plan was introduced by CMG Financial in the mid-2000s to give US borrowers access to similar products to the offset mortgage used in the UK.

• This hybrid mortgage uses a checking account to reduce the mortgage amount, allowing the borrower to pay less interest each month.

• CMG plans allow borrowers to make smaller payments on the loan amount each month than one large payment (on a traditional mortgage).

This is how a CMG plan works

With CMG plans, paychecks are deposited directly into the mortgage account, and that amount reduces the mortgage balance. These types of mortgages allow borrowers to pay off their mortgage balance faster.

As checks are written against the account throughout the month, the mortgage balance increases. Any amount deposited into the account that is not debited by writing checks is credited at the end of the month as amortization of the mortgage loan.

The CMG plan is similar to the offset mortgage plans used in the UK and Australia. Mortgages cannot be used in the US due to tax laws. Savings interest is tax deductible against mortgage interest in the UK, but not in the US.

Pros and cons of a CMG plan

There are potential benefits of the CMG mortgage plan. First, when the paycheck or other deposit is deposited into the account, it reduces the average monthly outstanding principal balance on the mortgage. If the outstanding principal balance decreases, this may reduce the interest charged.

This type of plan accrues interest on a daily basis. Even if this principal balance at the end of the month is the same as at the beginning of the month, you have paid off the interest.

The plan also assumes that at least 10% of the paycheck remains in the account at the end of the month to permanently reduce the principal balance of the mortgage. A savings rate of 10% results in a more significant monthly principal reduction than a traditional 30-year amortizing mortgage. This significantly shortens the mortgage term and saves additional interest.

The potential disadvantages of the CMG mortgage plan are that it may have a higher interest rate than conventional mortgages and that a borrower can achieve the same principal prepayment by making unscheduled principal payments on a conventional principal mortgage.

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