When to choose Current Account Mortgages

Within the last ten years, current account mortgages have become a very popular choice for people seeking to buy a home. Basically, a current account mortgage is like having a large overdraft.

How Current Account Mortgages Work

A Current Account Mortgage allows you to consolidate your overdraft, mortgage, and personal loan into one flexible account. The amount you owe to is linked to the one bank account. Monthly payments into the account will reduce the loan and cut the amount of capital interest you owe. Every time you withdraw, the overdraft increases. This type of deal eliminates penalties by allowing you to overpay and underpay. You essentially repay the loan at the set time by reducing your borrowing, or using a separate investment to repay the capital debt.

Advantages

When paying off your mortgage early, you save money on interest charges. This is because your credit balance reflects the decrease or increase in the interest you owe. There are also tax advantages with current account mortgages. You don't pay any tax on the reduced interest you pay. As well, all of your borrowing is at the same rate as your mortgage. Many mortgage lenders will help you keep account of whether you are ahead or behind in repayments. Also, some lenders allow loans to be attached to these mortgage accounts, with interest charged at the same rate as the mortgage.

Disadvantages

With a current account mortgage, all debts are secured against your home. If you fail to make payments, you could lose your home. Another concern is that the interest rate you pay may be higher than with traditional mortgages. If you only want to reduce your monthly spending, you may want to consider looking for a mortgage with the lowest rate.

Interest Charges

Interest charges on all your borrowings are at the cheaper variable rate for mortgages instead of the more common credit card rates. (15% - 20%) Many supporters of current account mortgages believe they are the most effective way for borrowers to manage their money and greatly reduce the amount of interest paid on the mortgage. A lump sum going into your current account each payday can help reduce your mortgage debt by earning interest, which is usually calculated on a daily basis.

Considerations

You have to be financially disciplined. You might be tempted to spend all of your overpayments only discover you have not reduced your debt. Overpay when you can, but only underpay when it is absolutely necessary. Another factor to consider is that the rates on current account mortgages tend to be slightly higher than deals you can get for fixed-rate or discounted mortgages. You may need to research to see if you would be better off taking out this type of mortgage. If you have little savings or non-mortgage debt, you may be better off with a more traditional mortgage. When considering a current account mortgage, always seek a mortgage specialist’s advice.