Innovations in Lending

The Ratchet Mortgage and One account are two new lending products that align with the mission of credit unions.


Excerpted From

The Ratchet Mortgage ™

What is it?

The Ratchet Mortgage is a proposed mortgage product with a coupon rate that automatically adjusts downward in a falling interest rate environment but never readjusts upward. It combines features of fixed-rate mortgages and ARMs to offer what is in effect a one-way ARM, thus mimicking the behavior of a rational borrower who refinances when interest rates fall. Because the rate adjustment is automatic, it is not contingent upon a borrower’s current credit score or any other qualification standard.

Benefits to Members

By automating the process by which a borrower obtains a lower rate, the Ratchet Mortgage will in theory optimize the rate paid over the life of the loan compared to the rate paid by borrowers who have to pull the refinancing trigger and risk doing so too early, too late, or not at all. And because these rate reductions are not contingent upon a borrower’s current FICO score, the Ratchet Mortgage delivers savings to those that might otherwise be ineligible for but are in great need of refinancing.

Benefits to Lenders

The Ratchet Mortgage allows lenders to more accurately project future revenue and model the balance sheet by diminishing the incentive for refinancing-related prepayments. Additionally, lenders gain the ability to better control their operating expenses, which in the current landscape can be buffeted by refinancing boom-and-bust cycles. Finally, by eliminating the incentive to refinance, a credit union stands a much better chance at retaining all of a member’s relationship.

The One Account

What is it?

The One account is a mortgage product that pools a member’s checking and savings account balances to ‘offset’ the current mortgage loan balance. The interest payment on the mortgage is based on the reduced offset value, not based on the actual higher mortgage balance. For example, if a member has $10,000 in share balances, they will pay interest on only $90,000 of a $100,000 mortgage loan.

Benefits to Members

The One account puts member’s low-interest bearing money to work for them, while maintaining their liquidity. Although a member forgoes interest on their share accounts, they pay less on their mortgage interest and eliminate interest income taxes. For example, a member in the top tax-bracket with a 4.95 percent interest rate on their One account would need to earn 8.25 percent on a taxable account for the same benefit.

Benefits to Lenders

The One account presents a compelling case to choose one financial institution for all their mortgage, savings, and checking accounts. In addition, it serves to encourage increased share balances per member by providing enough incentive to compete for shares with popular high-yield online savings banks.

Member Loyalty & Retention

Qualitatively, both the Ratchet Mortgage and the One account promote ‘stickier’ member relationships. In addition to providing better economic value, these products provide the powerful benefit of time. Members no longer need to spend time researching rates, making refinancing decisions and staying abreast of their balances. And perhaps most importantly, products like these create trust that the institution is committed to the borrower’s financial well-being and not exploiting ignorance or passivity.




Nov. 13, 2006


  • i was wondering what index will be used to adjust the interest rate downward. also you cannot go back up ever even to the initial rate? The one acct. sounds great for some members.