What exactly are current account mortgages and offset mortgages?

A current account mortgage combines a mortgage with one, or more, of the following: a current account, a savings account, a credit card and an unsecured loan all within one account.

This means that you have all your credit balances offset against your debit balances, with interest being charged on the net amount of debt only. So if you have £10,000 of savings and a mortgage of £100,000 you would be charged interest on the net amount: £90,000. A current account mortgage effectively seems like a very big overdraft.

An offset mortgage works in a similar way. Each account is separate, but linked, so that credit balances in savings accounts are offset against your mortgage (debit) balances. Again this means that you are charged interest on your net debt only.

The available facilities of offset mortgages vary and not all of them will offer, say, a current account as part of the package.
The majority of new mortgages of this type that are launched take the form of an offset mortgage rather than a current account mortgage but effectively they perform in the same overall way.

Interest

As with traditional mortgages, offset mortgages are available with fixed, tracker or discounted initial interest rates.

As your savings are being offset, you don’t have to pay interest on them or tax on the proceeds which is why offset mortgages are more tax efficient for taxpayers and especially for higher rate taxpayers. It is important to note that, because the balances in the savings account and current account are offset against the mortgage, you do not actually physically get paid interest on them. That is also why there is no income tax payable on the savings interest.

The interest rate applicable at the end of any initial introductory period (known as the ‘revert to’ or ‘go to’ rate), is for many current offset mortgages a tracker linked to a margin over Bank of England base rate, which may compare favourably with the standard variable rate of conventional mortgages.

Be aware that interest rates charged on offset mortgages tend to be slightly higher than for standard mortgages. This differential has narrowed considerably in recent years and some lenders no longer charge a premium for offsets.

Advantages of offset mortgages

An advantage of offsets is that if you are committed to offsetting over the long term, you won’t face the hassle or expense of having to remortgage every few years. Note that it is possible to remortgage away from an offset should you so desire, but , as with all mortgages, make sure that you are aware of the amount of any early repayment charge (ERC) and the period for which it applies.

Offset mortgages come with flexible features, such as permitting overpayments, underpayments or payment holidays (but remember that some non-offset mortgages also carry these features). You need to be disciplined to take advantage of such features as the apparent availability of a very large overdraft may prove to be a temptation too far.

Offset mortgages also allow you to make large lump sum payments to reduce the size of your mortgage, making them attractive to individuals in receipt of large bonuses, commissions or who have a fluctuating income.

By offsetting your savings – and maybe current account - against your mortgage, you will pay less mortgage interest, less tax and if you make overpayments from time to time, you will clear your mortgage more quickly.

Who are offset mortgages suitable for?

As a generalisation – and by no means exhaustive - offset and current account mortgages may suit borrowers with one or more of the following characteristics:

• higher rate taxpayers;
• people with a reasonably high level of savings;
• people with irregular income streams (eg. Those who get bonuses or the self-employed);
• people with buy-to-let properties.