Could you pay less interest and reduce your mortgage term by switching to a current account offset mortgage?
A current account mortgage is a flexible mortgage arranged in conjunction with a current account. The current account and mortgage are combined into a single account. The main benefit lies in the fact that any positive balance that would otherwise be held in a separate current account reduces the outstanding mortgage by that amount.
Because a current account mortgage allows you to operate your mortgage borrowing through a current account, it is in effect like having a very large overdraft. So, for example, if you had a mortgage of £100,000 and £1,000 credit in your account your balance would show as £99,000 in the red.
These mortgages can allow you to pay off your mortgage early as any cash going into the account, such as salary and savings will reduce your outstanding debt. Therefore, if you are disciplined you can save on the amount of interest you repay and the length of your mortgage.
However one draw back can be having to keep all your finances in one place, in one single account, which can make it harder to manage and more tempting to borrow rather than save.
In addition to offset mortgages, a similar type of mortgage is available; offset mortgages. These mortgages work in a similar way, offering the same offsetting benefits as a current account mortgage, but rather than having a single account, the mortgage and current account are kept in separate accounts.
Most current account mortgages are variable rate mortgages whereby the amount you repay increases or decreases in line with any interest rate changes.
Most also offer flexibility in allowing over payments to clear the loan earlier, or limited periods of underpayment if required. Others also allow a credit limit on top of the agreed mortgage, depending on the amount of equity in the property, like a loan facility. The catch lies in the loan-to-value ratio negotiated at the outset. The higher the loan-to-value agreed, the higher the rate of interest even if you never use the full loan facility.
You may be required to pay your salary into these accounts.
Compare current accounts via money.co.uk
