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These types of mortgage are extremely new to the
A ‘Current Account Mortgage’ is a mortgage that holds the mortgage, savings and current account all in the same account. It is probably easiest to explain it as one large overdraft and your mortgage borrowing is the credit limit. Any savings and salary paid into the mortgage will reduce the debt outstanding and the lender charges interest on a daily basis on the amount outstanding.
The ‘Offset’ mortgage was designed specifically for the UK market as most UK borrowers don’t like everything in the same place and like to have different ‘pots’ for different things. With an offset facility you can hold your mortgage away from your savings and current account but they are still held with the same lender. In the background the lender calculates the net balance outstanding (Mortgage balance – Savings – Current account credit balance= Net balance outstanding) and charges interest on that balance.
The facility is the natural progression from the flexible mortgage with the lender offering the borrower the ability to house savings and current account within or linked to the mortgage account. Instead of paying the borrower interest on their savings or credit balances on current account, the lender ‘offsets’ the balances against the mortgage and only charges interest on the net balance outstanding. The following example shows the interest savings that can be achieved by a borrower with a £100,000 capital and interest repayment mortgage over 25 years (assuming a constant interest rate of 5.75%) holding £5,000 in savings within the mortgage and paying a salary of £2,000 per month through the account which is spent in full every month:
|
Interest Method |
Monthly Payment |
Term |
Total Payable |
|
Current Account/ Offset Mortgage |
629.11 |
21 years & 11 months |
£169,314.16 |
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