Guide to Current Account Mortgages
A current account mortgage is the most effective form of the increasingly popular ‘offset’ mortgages. With offset deals, your lender pools your finances before working out how much interest you need to pay on your mortgage.
Eight years after being introduced in the UK from Australia, current account mortgages are finally entering the mainstream. Major lenders such as Barclays, Cheltenham & Gloucester and First Direct all offer current account loans, alongside smaller players such as Intelligent Finance and The One Account.
With a traditional mortgage of, say, £100,000, you pay interest on the full amount. But if you have an offset mortgage and keep £10,000 in a linked savings account you need only pay interest on the balance of £90,000.
And if you have a further £2,000 in a current account, you'll only pay interest on £88,000.
Advocates of current account mortgages say they are the most efficient way for borrowers to manage their money and dramatically reduce either the amount of interest paid on a mortgage or the length of its term.
Even if you spend your whole salary each month, the fact that a lump sum went into your linked current account on payday can still help reduce your mortgage debt by earning interest, which is commonly calculated daily.
It sounds appealing. But there are disadvantages lurking amongst the good news.
Some brokers say that current account mortgages promise much but deliver little. The main problem is that the interest rate you pay will be relatively high. If you simply want to reduce your monthly outgoings, you are likely to be better off just shopping around for the lowest rate instead.
Research by David Bitner, head of operations at Bradford & Bingley's The MarketPlace, shows that at today's interest rates people only really benefit from offset loans if they are higher-rate taxpayers with at least 40% of their loan value in linked savings or current accounts.
And basic-rate payers need at least 20% cent – or savings and current account balances of at least £20,000 – for every £100,000 of their mortgage.
“If you don't have this much money put aside then your annual mortgage bill will be lower with a good discount deal,” says Bitner.
A few simple sums can help you to work out if a current account mortgage is the best deal for you.
First, add up how much interest you will pay on your mortgage in a year on a best-buy discount deal.
Then add up how much interest you will make, after tax, on your savings and current account over a year, and deduct this from the first figure – that's your total cost on a traditional mortgage/savings arrangement.
Next, work out how much you would pay on your mortgage at a best-buy current account rate after deducting the value of your savings and current account balances from your mortgage debt.
If this figure is lower than for the traditional mortgage, a current account deal is for you.
