What Is a Credit Offset?

Mortgages

A mortgage is based on a contract between the borrower and lender. The lender, or creditor, agrees to loan money for purchasing property, but requires that that property also be used as collateral for the mortgage. This means that the lender has the ability to foreclosure on the property if mortgage payments are not made. However, in some situations a borrower creates a mortgage with the same bank that the borrower uses for other purposes, such as keeping checking and savings accounts. This can lead to a credit offset by the lender.

Banks often have the right of offset when it comes to multiple accounts used by the borrower. This means that if the borrower stops making monthly payments on the mortgage, the bank has the right to offset this lack of credit payment by collecting cash straight from a borrower's account. This is legal and is an efficient method of collection on the part of the bank, since the lender does not have to wait for the mortgage to fully default and file for foreclosure. Of course, it only works if there is enough money in the accounts to cover the missing payment.

The right of offset is mentioned in mortgage contracts. If there is no right of offset given in the contract, the bank may not be able to seize assets in such a way. The right of offset is common, but borrowers can examine their specific contracts to find how it works for their particular bank. The right only exists if accounts are present with the same bank that the borrower is using for the mortgage.

A credit offset should not be confused with a garnishment. They both seize money from a bank account, but in an offset the bank is exercising a right to money that it is due and has access to. In a garnishment, a court has ordered the forced payment of a debt and takes money from an account -- nearly any account -- in order to pay, regardless of the position of the lender.