Current Account Mortgages

Benefits and Features of a Current Account Mortgage

Current account mortgages (CAMs) suit many borrowers, in particular the self employed and people with variable incomes, including those who earn bonuses or large amounts of commission. CAMs can also work favourably for those borrowers with existing cash savings.

A CAM is incredibly flexible because it allows a borrower to offset any savings they have against their mortgage and other debts and to make overpayments or underpayments according to their current financial situation. However, with this flexibility comes a requirement for restraint, if borrowers are not to be tempted to overextend themselves financially and massively increase their total indebtedness.

Current Account Mortgage Do's & Dont's
Combining savings and debts into a CAM allows existing debts to be repaid at the mortgage interest rate level rather than at a higher unsecured loan rate or credit card rate.

Nonetheless, in order for this strategy to be cost effective, it is advisable for the debt to be paid off just as quickly as a high interest rate loan would be repaid. If it were simply added to the mortgage debt and repaid over a long period, far more interest would be paid in the long-run.

It is worth bearing in mind that the real advantage of a CAM can be seen when considering a higher rate income tax payer. If they have a large savings account, then they are required to pay tax on the interest income at the higher tax rate. By putting the savings into the same account as the mortgage there would be no interest received and, therefore, this would reduce the income tax liability.

Because bank and building society savings rates are so low at present, changing from receiving say 3 percent, after tax on savings to receiving 6 percent (without any tax liability) on reduction of mortgage interest is tempting for many people, particularly higher rate income tax payers.

The temptation to use the flexibility of a CAM to finance that new car or dream holiday can also be very strong for some people. High value impulse purchases can play havoc with an individual's finances and affect the ability to make adequate monthly payments, unless their regular income is sufficiently high to allow them to continue to reduce the total debt in their CAM, year on year.

In short, the key to managing a CAM successfully is: make overpayments whenever you can afford to but only make underpayments when you really have no other options.

Summary
A CAM works particularly well for those paying the higher level tax on interest income from savings;
with a CAM the borrower has the option of underpaying or overpaying on the monthly payments;
having this flexibility can be extremely useful, but it is worth considering that the interest payable is normally higher than on a standard mortgage; therefore, a CAM should only really be considered by those who are likely to pay the mortgage off more quickly;
resist the temptation to use the offset mortgage as a way to underpay and finance an extravagant lifestyle!