Even though current account mortgages have been around in the UK for well over 10 years there is still an air of mystery surrounding them.
Indeed, with only half a dozen or so lenders offering true current account mortgages, one could regard it as a niche sector.
That, however, would ignore the bigger picture of the growing popularity of the offset sector as a whole, of which current account mortgages are a part.
According to Moneyfacts, there are over 250 offset-type mortgages in existence and The Survey of English Housing found that about 8 per cent of home owners have an offset or current account mortgage.
Significant growth
In its report ‘Offsetting Behaviour’, the Council of Mortgage Lenders (CML) showed that there had been significant growth in the UK’s offset mortgage sector.
During 2006, 170,000 offset mortgages – worth £23.9 billion – were taken out. That’s equivalent to 7 per cent of all new lending. Between April 2006 and March 2007, the year-on-year growth amounted to 49 per cent by value, compared to just 15 per cent for non-offset lending.
Perhaps the most striking of the CML findings was the huge growth in offset mortgages that were sold by intermediaries; around 60 per cent by value compared with 45 per cent in April 2005.
Basic premise
So, let’s just confirm exactly what a current account mortgage is;
A current account mortgage pools a customer’s mortgage loan, savings and income into one single account. Within this account, customers not only have their mortgage loan but also run their current account where they can use an ATM for cash, and a debit card, credit card or cheque book for purchases and can ringfence their savings. Deposits and withdrawals are recognised in the overall balance.
The basic premise is that any money that sits in the current account mortgage, whether savings or income, reduces the size of the overall loan, and because interest is charged daily, it reduces the amount of monthly interest repayments.
But there are many other benefits offered by current account mortgages.
For the growing numbers of self-employed in the UK, a key benefit of having a current account mortgage is the ‘double whammy’ effect of ringfencing money to pay their income tax bills while at the same time reducing their monthly interest repayments.
There are now over 3.5 million self-employed people in the UK, much of this growth having been fuelled by the explosion in ‘white-collar’ self-employment through people setting up consultancies, agencies and doing freelance work in the service sectors.
Using a current account mortgage they can avoid the headache of finding the money to pay their tax bills by paying everything into a current account mortgage and then putting the money they need to pay their bill in a ‘virtual pot’. While this money sits in their account it makes inroads into the outstanding loan and their monthly interest rate payments.
The benefit of flexibility
The flexibility that a current account mortgage offers self-employed customers is also key. The ability to underpay when cashflow is tight or to overpay when business is booming means that the worry about making ends meet is diminished.
Another major benefit worth mentioning is that any money that sits in a current account mortgage is exempt from income tax, as it is regarded as a mortgage not a savings account.
Current account mortgages offer great opportunities for mortgage advisers to generate income from other products. Because the self-employed have to ‘look after’ themselves, brokers can talk to them about funding things like increased life insurance, healthcare cover, critical illness, income protection and longer term retirement planning from the money that their clients save each month from reducing their outstanding loan.
Generating income
Mortgage advisers can also generate additional procuration fees by helping their clients to get into or expand their interests in the buy-to-let (BTL) market.
A client can borrow back some of the money in their current account mortgage to finance a deposit for a BTL property. A broker who helps a client to do this will obviously earn an additional procuration fee for arranging the BTL mortgage and can then repeat this process as their client builds a portfolio.
With the mortgage market having changed significantly in the last 12 months the opportunities offered by current account mortgages should not be ignored.
Not only do they offer customers flexibility in the way they manage their money, they also provide intermediaries with real prospects to grow their income streams.
