The current account mortgage is attracting much commentary and debate in the industry. Now that eight providers are offering this new concept in mortgage provision, Paul Holden, Head of the Inter-Alliance mortgage desk finds out what all the fuss is about
The advantages are significant – any influx of funds to the account, such as salary bonus, share dividends immediately reduces the outstanding balance of the loan. As interest is calculated daily (in most products) this results in lower interest charges. This in turn allows a shorter mortgage term, resulting in less interest paid over this shorter term.
The disadvantage is primarily a psychological one. Individuals may balk at looking at their bank account to discover they are a few hundred thousand pounds overdrawn, and may feel they are perpetually in debt. That said, this could be considered positively – the current account mortgage accurately reflects their financial situation, and it can be argued this encourages the borrower to clear the debt sooner.
However, current accounts are not suitable for everyone. They are best targeted at financially astute borrowers who value the flexibility and control that current account mortgages can offer. They are also particularly suitable for borrowers who wish to fast clear their mortgage. They are also appropriate for business owners, amateur and professional landlords and workers who earn significant bonuses or additional earnings.
The way in which current account mortgages really come into their own is the way interest can be reduced by controlling payments into and out of the account. This is achieved through arranging for the salary to be paid into the account and the mortgage and other standing orders to be paid out of this account as far apart as possible. This means that for 27 or 28 days of every month the full effect of the net salary reduces the capital balance and therefore the interest payable. This gives an artificially lower balance for most of the month, leading to much lower interest payments.
There are further benefits to be achieved for Landlords, who can select a number of buy-to-let current account mortgages. The landlord can pay into the current account the full amount of the gross rental income and organize for the loan repayment to come out of the account at the other end of the month, thus reducing interest payments. The Landlord can even write a cheque from the current account for his tax bill, thus keeping his entire property management under one account.
Directors of private limited companies and the self-employed can also use a current account mortgage as the ultimate flexible overdraft facility, using far more competitive rates than other overdrafts by paying income or revenue into the account and withdrawing the funds instantly to pay bills. The net effect would clear a domestic mortgage by reducing interest payments over the mortgage term.
Current account mortgages can also be used for effective financial planning. They can be used, for example, to lump sum fund a pension or investment by waiting until year end bonus' are declared and dividends from other investments, maturing bonds or Tessa's and tax bills calculated. These funds can be stored and controlled in a current account mortgage that reduces (albeit temporarily) the capital balance outstanding and the interest payable there upon.
So it should be considered that current account mortgages are an excellent addition to the financial adviser's armoury. However, they are to be recommended with the caveat that they are not for everyone. To truly benefit from them, a client must be self disciplined and excellent at planning their finances. For the ill disciplined, there is a temptation to operate them as a conventional current account, negating the benefits and exposing the lender to higher interest rates.
However, the current account mortgage should be welcomed by financial advisers and consumers alike, if only for the extra choice it offers in a fast-evolving marketplace.IFAonline
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