Current Account Mortgages Explained

Current account mortgages can be the quickest and most affordable way to pay off your home loan if you’re financially disciplined. But they aren’t always the right choice for everyone.

In this article, we’ll explain what a current account mortgage is, who is eligible and why it’s important to seek advice from a specialist broker before committing to one.

What is a current account mortgage?

It’s a type of offset mortgage that combines your current account and mortgage balance into one. The cash in your current account is an overpayment fund on your mortgage every month, allowing you free access.

Typically, they suit high earners who earn significantly more each month than they spend or those who experience vast differences in monthly income and keep large sums of money in their current account for liquidity.

Some providers will also allow you to link credit card or loan balances to your mortgage.

How do they work?

For example, if your mortgage balance is £200,000 and you have £5,000 in your current account, your balance would show as overdrawn by £195,000. However, your mortgage interest would only be calculated at £195,000. As most current account balances go up and down throughout the month, interest is calculated daily.

You still need to meet the monthly contractual payments set out in your loan agreement, but by overpaying each month, you reduce the length of your loan and the overall cost of borrowing.

Typically, your overpayment fund is at its highest when you get paid and gradually diminishes as you use the account. If you don’t already hold your current account with the mortgage provider, you will have to open one as part of the application process.

You can use our offset mortgage calculator below to see how this could work out for you based on your specific circumstances.

What are the benefits?

There are several benefits to this type of loan. The most obvious is that you can become mortgage-free more quickly. Subsequently, your mortgage is cheaper in the long run than an equivalent loan on standard repayment terms.

You will pay tax on interest earned if you generally have large sums of money in a standard current account. A current account mortgage will show a negative balance, reducing your tax bill.

As a regular saver, you can increase your account balance over time to reap even more rewards.

In addition, you retain flexibility and can access your cash whenever you want to. With a standard mortgage, if you make overpayments, you must apply for a new loan or remortgage if you later decide you need that money back. This will mean paying more interest, having the hassle of completing an application and waiting for funds to arrive.

How a broker can help you secure the best current account mortgage

Not many high street lenders offer current account mortgages, and, as a result, there is less competition. This means interest rates are higher than expected, and you will usually have to approach a specialist lender – particularly if you want to take advantage of the best offers.

Your best route to securing the most favourable deal is to speak to a broker with experience in this specific lending area and solid working relationships with specialist lenders.

If you get in touch, we’ll arrange for a specialist broker we work with to contact you directly for a free, no-obligation chat.

Eligibility criteria

Eligibility criteria for this type of home loan are often quite strict, but the size and source of your monthly income will be the major factor.

Income: You will need to demonstrate a healthy income that more than covers your outgoings each month. You may also need to commit to keeping a minimum amount in the account. With some lenders, this can be as little as £100, although that would mean paying higher interest rates without really getting the benefits.

Deposit: You will need a deposit of at least 20% and, in some cases, as much as 40% to begin with. With a deposit of this size, it’s definitely worth exploring other options, as you could qualify for the best rates with many big-name lenders.

Credit file: Most lenders will insist you have a clean credit file, especially if they offer you their best rates. Some bad credit might not be too much of a problem, but you will most likely have to offer a satisfactory explanation.

Age: Older borrowers are less likely to be accepted, as providers are concerned that their monthly income will drop after retirement.

Property type: Even fewer lenders offer current account mortgages for non-standard constructions (i.e., anything not brick and mortar).

Which lenders offer them?

A handful of high street lenders offer them, including:

• Natwest
• Barclays
• RBS
• HSBC
• Woolwich Building Society
• Post Office

There are also several specialist lenders that are not household names and usually only take applications via a broker.

Even when considering a current account mortgage with a mainstream provider, you should speak to a broker with whole-of-market access rather than approach the lender directly. The lenders’ brokers are only able to advise on their products, so they won’t be able to offer a comparison.

Rates typically start at around 1.54% on a 2-year fixed rate for borrowers with a 40% deposit who match all other eligibility requirements. With a 25% deposit, the best rate is around 1.83%. The rate offered depends on how closely you match the providers’ risk profile.

What is a mortgage reserve account?

Mortgage reserve accounts are rarer than current account mortgages and effectively work as a secured overdraft that allows you to borrow against the equity in your property.

The lender will secure a charge over your property and approve an amount of money as your reserve. This reserve is not paid to you in a lump sum but is available to dip into as and when needed, as you would with a standard overdraft.

This suits people buying a property and carrying out a major renovation. They have peace of mind knowing the funds are ready to withdraw as the project develops, but they only pay interest on the amount they have drawn down. Loans are usually interest-only, and interest is calculated daily according to the balance.

Get matched with an expert current account mortgage advisor

A well-managed current account mortgage has the potential to save you a considerable sum of money over the term of your loan. But if it’s not the right product for you, you can end up overpaying for your home.

A broker will discuss the advantages and disadvantages of current account mortgages according to your circumstances and compare the deals available with every alternative on the market to ensure you get the one right for you.

Our broker matching service will connect you with a broker with experience in this specialist area of ending and a track record of securing the best deals for people in your situation.

Call today on 0330 818 7026 or enquire online to arrange a free, no-obligation chat.