Introducing the Manageable Mortgage
I suggested that the standard mortgage was very difficult
for many borrowers to manage because of its rigid payment
obligation, the fixed payment period and payment amount, and
the high cost of building a payment reserve. This article
introduces what I will call the Manageable Mortgage which
has none of these problems. It would give borrowers the
leeway to integrate the management of their mortgage into
their lifestyle and budgetary practices, without weakening
the discipline that many borrowers require.
the Manageable Mortgage Would Work
Interest would accrue daily instead of monthly, so borrowers
have an incentive to pay early rather than late. Payments
would reduce principal by the same amount on the day
is nothing novel about this, HELOCs and simple interest
loans work this way now.
could be made on any day for any amount. Since interest
accrues daily, there is no need to partition payments into
interest and principal components. Payments go entirely to
The discipline imposed on the borrower is defined in terms
of the loan balance rather than the payment.
On any given day there is a maximum balance which
declines day by day over the term of the loan. The maximum
balance schedule is shown in the note.
as the loan balance is below the maximum balance, the
borrower is OK.
It doesn't matter, furthermore, how the balance was reduced
to its current level.
It is up to the borrower to determine when payments
are made and how large they are.
technique of defining the borrower’s obligation in terms of
the balance r at her than t he payment has also been used
before, notably by CMG which created such a mortgage prior
to the financial crisis. You can read about CMG
A borrower is in violation when the actual balance is
greater than the maximum balance.
(Call this "excess balance").
An excess balance up to some amount stipulated in the
note might be allowable, the equivalent of the current
15-day grace period.
No late charges need be imposed, however, because
interest would continue to accrue.
minimize disruption to existing systems, a delinquency could
be defined as an excess balance exceeding 30 days, while a
default would be an excess exceeding 90 days.
The schedule of maximum balances could be defined as the
balances in an amortization schedule based on
fully-amortizing monthly payments. It also could be
hand-tailored to the payment preferences of the borrower.
the schedule of maximum balances is defined, borrowers would
be provided with amortization schedules based on their own
payment preferences. If they wanted to pay biweekly, for
example, they would receive a biweekly payment amortization
In addition, borrowers would have access to their loan files
on the internet. On the day they log in, they would see
their current balance, maximum balance, and the number of
days until their balance equals their maximum balance
Borrowers would also be
offered easy simulation capacity so they can play "what ifs"
with regard to future payments.
They would be able to specify future payments in a
variety of ways, and in each case trace the impact on the
balance versus the maximum balance.
In this way, the Manageable Mortgage could become the
core of the intelligent household's financial planning.
Eliminating Rigidities of the Standard Mortgage
Manageable Mortgage would eliminate the rigidities of the
Could Be Skipped or Deferred:
cannot skip a payment on the standard mortgage under any
circumstances. On the Manageable Mortgage, in contrast,
borrowers could skip a payment so long as their balance
stays below the maximum. Those with fluctuating income could
adopt a payment schedule at the outset that is a little
larger than needed for full amortization, building in the
capacity to skip one or more payments. Alternatively, they
can build up the capacity to skip payments by making extra
Can Select Their Own Payment Period:
The standard mortgage requires borrowers to pay monthly. On
the Manageable Mortgage, in contrast, borrowers could elect
to make payments monthly, weekly, every other week, twice a
month or something else – whatever best suits their income
pattern and budget practices.
Can Reduce the Monthly Payment by Making Extra Payments to
standard fixed-rate mortgage, borrowers cannot reduce their
monthly payment by making extra payment to principal. On the
Manageable Mortgage, in contrast, there is no required
payment, so the borrower who reduces the balance by making
extra payments can reduce the periodic payment without
breaching the maximum balance rule.
Can Accumulate a Payment Reserve Without Loss of Interest:
With a standard mortgage, a borrower with excess cash can
either make payments early, losing the interest saving, or
pay down the balance to save the interest, but not both. On
the Manageable Mortgage, the borrower can do both because an
extra payment saves interest at the mortgage rate, and also
allows a reduction in future payments.