Current account mortgages
Current account mortgages explained
Current Account or
Off-Set Mortgage
A variation of the Flexible mortgage is known as the
Current Account Mortgage. The current account and
mortgage account balances are offset against each
other for the purposes of calculating interest on a
mortgage
An offset mortgage is a type of mortgage common in the United Kingdom used for
the purchase of domestic property.
The key feature of an offset mortgage is the ability to reduce the interest
charged by offsetting a credit balance against the mortgage debt. For example,
if the mortgage balance is £200,000 and the credit balance is £50,000, interest
is only charged on the net balance of £150,000.
Offset mortgage lenders
Lenders normally set a credit limit at the outset of the mortgage and allow
borrowers to credit and redraw up to this limit and this limit may be periodically
reviewed. The lender may place restrictions on the lending limits towards the
end of the mortgage term with the aim of ensuring capital repayment. However
many lenders allow full drawdown up to the end date of the mortgage where the
loan must be repaid. This can cause great problems for undisciplined borrowers
and those approaching retirement if the lender is unwilling to extend the term especially on the grounds of age.
Current account mortgages
Some lenders have a single account for all transactions, this is often referred
to as a current account mortgage or CAM.
Other lenders have multiple accounts. As a minimum there is a mortgage account
and a deposit account. Often the lender allows multiple accounts for credit
balances and sometimes for debit balances. These different accounts allow the
borrowers to notionally split their money according to purpose whilst all
accounts are offset each day against the mortgage debt.
Partial reconfigurations of the offset mortgage are being introduced in the
United States, however due to differing US mortgage policies and accounting
practices as well as US tax laws these programs are generally not effective
Within the UK offset mortgages are often marketed as offering 'tax efficient'
savings. Interest generated within deposit accounts for UK residents is deemed
income and is taxed at source (the rate has been 20% since 1983). Within an
offset mortgage arrangement the notional 'credit' balance does not generate
income but instead saves an amount of mortgage interest that would otherwise be
charged. As no interest payment is made there is no tax charge.
Current account and offset variants
Within the UK, many mortgage lenders offer offset mortgages. They fight for
their share of the market by offering extra features or variants to the basic
offset mortgage concept.
For example, some lenders have offset mortgages with an interest only payment
schedule and full monthly interest offset. This means that the monthly interest
payable is based on the balance on the mortgage account less the balances in the
deposit and savings accounts. This results in lower sums of interest being paid
by the borrower each month.
In another common variant, the borrower pays off capital and interest each month
as if the mortgage account were a standard Repayment mortgage (i.e. as if the
offset arrangement did not exist). However, the interest charged to the mortgage
account is less due to the offset arrangement, than the borrower actually pays
each month. This means that the borrower effectively overpays the mortgage each
month and pays off the mortgage account earlier than planned.
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