Although not particularly common, we still receive a number of enquiries from customers wanting to know more about this type of mortgage product, and whether it’s a suitable option for them.
This short guide explains exactly what a current account mortgage is, advantages and disadvantages of this type of mortgage, and typical lender eligibility criteria you need to meet in order to obtain one.
What is an offset mortgage?An offset mortgage is a type of home loan that involves combining a standard mortgage with one or more deposit accounts held by the same bank or provider.
Rather than using your savings to repay the mortgage, lenders deduct this figure from how much you owe so you’ll only pay interest on what’s left over. This means that you’ll usually pay less interest than with a standard repayment mortgage.
What is a current account mortgage?A current account mortgage (CAM) allows you to offset your mortgage against your current account.
Instead of displaying your current account balance and mortgage loan individually, the sum is combined into a single, large, usually negative, figure.
The amount of interest you’re charged will fluctuate in line with the rise and fall of the total amount in your current account.
How does a current account mortgage work?A CAM combines your debts and current account funds into one so you have a single balance to repay. It may also incorporate balances for loans and credit cards.
For example, if you have a £200,000 mortgage and £10,000 in your current account, you will technically be £190,000 overdrawn.
When you receive your wages, your debt will reduce to its minimum sum. As the month progresses and you pay out on your other expenses, your mortgage balance will gradually rise and the daily interest charges will increase.
As with standard mortgages, you will make your repayments every month for a contractually agreed term. The additional money in your account acts as an ‘overpayment fund’, which means that you technically pay off your mortgage quicker.
If you’ve got any additional savings, you could reduce the balance even further, or if interest rates are low, you could also transfer things like your credit card onto it, too.
What are the advantages of a current account mortgage?Current account mortgages are fairly niche products, and are generally only recommended if you regularly want to make mortgage overpayments, or work with underpayments and payment holidays.
They are most suited to those who have irregular income, such as contractors, or high income earners who regularly leave large sums sitting in their current accounts. They can also be more tax-efficient if you’re a higher- or additional-rate taxpayer.
The main benefit of having a current account mortgage is that, if you spend less than you earn every month, you will essentially be overpaying on your mortgage, and therefore clearing the loan faster.
You also have the flexibility of being able to access your savings and make withdrawals if you need to.
What are the disadvantages of a current account mortgage?Current account mortgages can be very well suited to certain borrowers, but they’re not for everyone.
Due to the nature of this type of product, the interest rates are typically a lot higher than you’d expect from a standard repayment mortgage.
Fewer lenders offer CAMs, so your choice may be limited and interest rates less competitive - although working with a broker gives you the best chance of securing a favourable deal.
It’s unlikely that you’ll earn any interest on any cash held in accounts linked to a CAM, and depending on your circumstances and the deals available, you may be better off putting the extra funds towards a larger deposit on a regular mortgage.
While not usually a requirement for other types of offset mortgage, most banks offering CAMs insist that your salary is paid into the same account.
If you’re not comfortable with being constantly overdrawn, or if you lack the time and organisational skills required to manage this type of account efficiently, a CAM may not be the most viable option for you.
Am I eligible for a current account mortgage?The size and nature of your income is the most significant factor that will determine your eligibility for a current account mortgage.
Not only will mortgage providers likely have minimum income requirements, if you don’t earn a sizable monthly wage that comfortably covers your outgoings and then some, it’s unlikely that this type of mortgage will be suitable for you. Want to discuss your options? Speak to a broker.
Provided you meet income requirements, there will be additional criteria you have to meet before lenders will consider your application. A few factors that could be the make or break of your CAM eligibility include:
Deposit sizeThe standard loan-to-value (LTV) ratio tends to be lower for offset mortgages than conventional mortgage types. In many cases, CAMs can require a deposit of 25% or more of the property’s value.
Credit historySince CAMs require borrowers to be well organised and on top of their finances, it can be particularly tricky to get one if you have a history of poor money management.
That being said, lenders may be willing to overlook some less severe types of adverse, and will also take into consideration how long ago it occurred, and whether your financial situation has improved over time. Speak to a broker for further advice on bad credit mortgages.
AgeMortgage lenders tend to view older people as higher risk, especially if retired. This is because you’re less likely to have a regular salary coming in, and your income will probably decrease.
Age can also impact the term length you’re eligible for, as lenders want assurance that you will live to see the term through.
The property typeNot every mortgage provider will lend on properties that deviate from the ‘standard’ bricks and mortar construction type as they are typically deemed higher risk.
If you’re looking for a CAM for a non-standard construction, it’s advisable to speak to a specialist as your typical high street lender is unlikely to offer these products.
Ask an expert: is a current account mortgage suitable for you?As current account mortgages are such niche products, it’s important to make an educated decision before submitting an application.
Our expert advisors have extensive experience in organising offset mortgage products for customers, and can recommend whether a CAM is the most appropriate and financially viable option for your circumstances. If not, they can suggest a suitable alternative.
Give us a call on 02380 980304 or submit an online enquiry. One of our specialist advisers will be more than happy to discuss next steps, and help you secure the most competitive current account mortgage rate.