Flexible mortgages
Current Account Mortgages
Current account mortgages incorporate all of the features
of a flexible mortgage, but take the concept of overpayment
to the next level. When you take out a current account mortgage,
it is usually a stipulation of the loan that at least one
borrower has his or her salary paid into a new current account
that is taken out for the purpose of the mortgage.
This allows or forces you to maximise the overpayment effect
of your income, with a potentially staggering cash flow
effect on your overall interest payments in comparison to
a standard mortgage.
All current account mortgages calculate interest daily
on the outstanding mortgage debt. This means your salary
starts working in your favour as soon as it is paid in.
At that point, the outstanding balance of your mortgage
debt will be reduced by the amount of your salary - usually
well above the amount that you need to pay off on a monthly
basis to maintain your repayment schedule. As such, your
salary is acting as a temporary overpayment on your mortgage,
with the size of the overpayment reducing over the course
of the month as you spend your salary.
Any overpayment that is left at the end of the month continues
to temporarily reduce your mortgage debt and therefore minimise
the interest that is added to the account each day.
Clearly, this means that the more frugal you are, the bigger
the potential benefits. Current account mortgages also offer
the opportunity for further savings on your interest bill
through careful structuring of your monthly expenses. If
you can ensure that all your monthly bills and direct debits
go out from your account immediately before your
salary is paid in, then this maximises the amount
of time that the each month's salary is working on your
behalf to reduce the mortgage debt.
Since one of the features of a current account mortgage
is the issuing of a cheque book and / or a debit card for
use with the account, a fair amount of discipline is needed
to get the best from the advantages that this type of set
up has to offer.
Another feature of most current account mortgages is the
setting up of a maximum borrowing facility with the lender,
usually up to a certain percentage of the property value.
This borrowing facility becomes like a credit limit for
the account, allowing you to consolidate your other debts
such as loans and credit cards. As long as you do not exceed
your limit, these can be paid off and the balance is transferred
to your mortgage account.
This facility means that you do not need to pay high credit
rates of interest, with the mortgage rate usually offering
a cheaper form of finance than is available elsewhere. However,
many lenders do not restrict the use of such a facility
to debt consolidation, bringing a temptation to use the
credit limit to pay for house refurbishments, school fees,
cars or holidays. While this is fine if you can afford it,
you should be aware that this will have the reverse effect
on your overall interest bill to overpaying. If the borrowing
on your mortgage account puts you behind your normal repayment
schedule, then it is likely to leave you either with larger
monthly repayments or a longer mortgage term and therefore
a significantly higher overall interest bill.
