Offset/Current account mortgage
Offset mortgages and current account mortgages are similar in that they use monies in current accounts or saving accounts to reduce monthly mortgage payments. However, they work in slightly different ways.
With an offset mortgage your, your main bank account or savings account (or both accounts) are linked to your mortgage. These accounts are normally also with your lender. The way they work is that the amount you owe on your mortgage is reduced by the amounts held in these accounts before calculating the interest due. As the amounts held in your bank accounts rises or falls, you are charged less or more interest on your mortgage accordingly.
For example if you have an 'interest only' mortgage of £100,000 and savings or a current account balance of £25,000, then you are charged 'interest' on the remaining £75,000 only. If the difference between the mortgage and bank accounts changes, then the interest charged will change.
Often, monthly payments will remain at an equal amount and 'overpayments' are used to reduce the overall mortgage debt. This is how you can pay off your mortgage early and save money with an offset mortgage. Some lenders will amend the monthly mortgage payment instead so that you benefit from lower payments but, of course, you won't be able to pay off your mortgage early.
Current account mortgage
A current account mortgage is similar to an offset mortgage in that it reduces the overall amount 'owed' when your savings or current account balance are taken into account. However, the mortgage and current/savings account are normally combined into a single account rather than being separate as with an offset mortgage. The account is effectively acting like one big overdraft.
The lender normally stipulates a minimum amount that needs to be left in the account each month to repay your mortgage over the agreed period. If there is a surplus, then you will pay less interest and pay off your mortgage early. Similarly, if you leave less than the required amount in the account, you will end up paying more for your mortgage.
A current account mortgage also normally has the typical features of a current account such as a cheque book, access via cash machines, direct debits etc.
Current account or offset mortgages are of particular benefit to higher rate taxpayers who may have substantial savings to 'offset' against their mortgage - and who like the flexibility of overpayments or underpayments. They may not be of much benefit if you don't have many savings to 'offset' or if lower interest rates or other features are of greater importance.
Select from the list below to find out more about the different types of mortgages or call us for a no obligation chat on 0844 346 3672.
John Charcol is not authorised to offer investment advice. We recommend you seek professional advice with regard to these topics if you believe they may affect you.