Current Account Mortgages
With a Current Account Mortgage (CAM), you run all of your finances through a single account – your mortgage, current account, savings and personal loans .
Any unspent income you have in your current account at the end of the month is automatically taken off the mortgage debt you owe. So say your monthly take-home pay is £2,000 and your total outgoings for the month are £1,800, the £200 left over comes straight off your mortgage, and you are immediately paying interest on a smaller amount of debt. And any savings you have are offset against any borrowings. Plus you can access your savings or overpayments (within limits) whenever you like without having to inform your lender. Again, a CAM has all the features of a flexible mortgage, with added convenience because all of your money automatically works harder for you.
CAMs genuinely allow the customer to take full responsibility for repaying their mortgage. CAMs also permit the more financially aware borrower to save time and money over the term of their loan. The aim is that the mortgage will be repaid before the borrower retires. As long as that is on course, there is nothing much wrong with a borrower increasing their borrowings by withdrawing from the current account. For this purpose, the lender will issue a chequebook to enable money to be withdrawn for any purpose. The only rule is that the maximum borrowing limit is not exceeded. Other rules for setting up a current account mortgage are normally that the lender will require a borrower to pay their salary into the account each month.
The lender will calculate interest on a daily basis. Every month, money is paid in and money would be taken out (as the account is used as a current account this is normal). At the end of the month, any money that is left over after income minus what goes out reduces the balance outstanding on the account. As long as this outstanding balance is regularly reduced, it is like making overpayments into an ordinary flexible mortgage. This allows you to potentially save thousands of pounds during the life of the mortgage and bring it to an end earlier.
In general, you will find that you pay for the flexibility of a current account mortgage through being charged a higher rate of interest than more traditional mortgages. The lenders are taking a risk both ways with this mortgage. They will make less money on the mortgage if you pay it back earlier but might not get the money back if you are unable to discipline yourself. It works both ways, and if you get it right, in particular the management of it, then it will benefit both the lender and the borrower.
It is important to make sure before you take out a current account mortgage that you are the right person for it.
A current account mortgage requires a great deal of discipline, not only in order to enjoy the savings that are possible should the overpayments described above happen, but also to just pay off the balance itself before you retire. Think about it, you have potentially many thousands of pounds in your current account always available to you, without needing a reason to avail yourself of it. Can you discipline yourself to make sure that balance is continually reducing?