Is a Current Account Mortgage Right for You?

Published: 07/02/2019 | Last Updated: 06/04/2020

As mortgage rates rise throughout both the UK and the world, borrowers are looking for a way to save money and lower their payments. Buyers should look beyond the traditional mortgages to reduce the obligations on a mortgage. In rising interest rate environments, unconventional mortgages may help buyers stretch their budgets. One unconventional mortgage to consider would be a current account mortgage.

A current account mortgage essentially allows borrowers to get ahead on their mortgage and lower their monthly payments. This type of mortgage does not necessarily have different terms than traditional loans save for a slightly higher interest rate. Instead, it allows borrowers to combine their bank account with their mortgage. Borrowers must pay a certain minimum monthly payment. Beyond that, borrowers are free to make their payments as they wish.

In a current account mortgage, the amount that a borrower has in their checking account is combined with the mortgage balance to make one large overdraft. The borrower’s salary is deposited into the account. As the borrower builds up their assets in the account, it reduces the amount of the mortgage debt. If the borrower can get ahead on their payments, the monthly payment goes down since it reduces the loan balance. Faster payments also mean that the loan balance can be paid off early.

The borrower is still allowed to withdraw money out of the account as necessary. If the borrower does take money out of the account, the mortgage balance grows larger and payments could increase. An advantage of the current account mortgage is that borrowers can transfer other debts into the account such as credit card bills.

This type of mortgage works best when borrowers have larger amounts of money coming into the account on a steady basis, continuously reducing the debt amount. They want to be making progress on eliminating their debt. In addition, borrowers will want to build up a cushion in case they have higher expenses in subsequent months that will require them to take money out of the account. However, when money is taken out of the account, it also reverses the process of debt reduction and the debt will swell back up again.

Current account mortgages are a good way to reduce your interest payments. Do bear in mind that you will likely be starting from a higher interest rate point than you would in a traditional mortgage. However, the bank will not be charging interest on the credit amount that a borrower has in the account. The other way that a current account mortgage benefits you is that your your savings can functionally earn a higher interest rate than it would in a traditional savings account because it is saving you a higher interest rate. However, you essentially have to pay that money back if you withdrew the money from the account. The best outcome is if a borrower is able to keep as much of the extra money as possible in the account.

Borrowers considering a current account mortgage should shop around for the best deal before taking out a loan. Since these types of mortgage are still considered to be unconventional, not all credit account mortgages are equal. Potential borrowers should contact at least three different lenders to compare the deals that they can get. If possible, also consider consulting a broker to do some of the comparison work for you. Mortgage brokers can shop around on your behalf and present you with the best option.

These type of mortgages usually start out with a low base rate for the first two years. Several mortgage companies will lock in a slightly higher rate for the first five years of the mortgage. After that the rate is variable.