Current Account or Offset Mortgages

A current account or offset mortgage allow a lot more flexibility in the way you manage your money. The interest is generally calculated daily, rather than monthly or yearly, which makes them a lot more efficient, and they generally allow you to overpay and underpay, deposit lump sums and withdraw lump sums without a charge, pay off the mortgage early  and take payment holidays. Some have a cheque book / credit card facility.  It sounds just like your bank account, doesn't it? That's because in many ways it is and one name for this kind of mortgage is a current account mortgage. By combining all your debt under one roof into what is effectively one massive, huge, gigantic, apparently terrifiying overdraft, these mortgages bring a number of significant benefits.

Firstly,  all your debt is brought down to the lowest interest rate: that of your mortgage.

Here's how it can work with the most flexible of these flexible mortgage plans.

Let's say you have a £150,000 mortgage, £10,000 savings in a deposit account and £350 in credit in your current account on the third day of the month (sound familiar?). You now have two options:

a) You can choose to pay the interest on the mortgage,  receive the interest on the £10,000 and receive the interest on the £300. This is the way things conventionally work.

 b) You can choose not to receive the interest on the £10,350 you are in credit and instead offset this credit amount against your debts, starting with your highest-rate debt first, i.e. your credit card, and then your mortgage. So, although you won't receive any interest on your credit amounts you will only be paying interest on a mortgage amount of  £139, 650. (£150,000 - £10,350 see?)

 There are two reasons why 'b' is the best option. Firstly, you're using your credit balance to avoid paying interest at a higher rate than you could ever hope to receive in a deposit account and secondly, you are not paying any tax on the interest on your savings.  For a higher rate tax payer this is particularly important as you would normally pay 40% tax on what ever interest you did earn on your savings.

You can find some great current account mortgage offers here on this site.  Just click on the links on the left hand side to find out more!