Archive for the ‘Current Account FAQ’ Category
A current account mortgage, also known as an offset mortgage, is a new way to make payments and save some money on your home loan. This mortgage is linked to a current account and offers more flexibility than your typical mortgage loan. You may also save quite a bit on interest payments, allowing you to pay off your mortgage more quickly.
This article will provide basic information about current account mortgages to help you decide whether this is the best mortgage option for you.
How a Current Account Mortgage Works
In the simplest sense, a current account mortgage allows you to offset the balance in your savings account against your mortgage, which reduces your interest payments.
For example, let’s say you have a £200,000 mortgage and £30,000 in your savings account. With an offset mortgage, you only pay interest on £170,000. This allows the borrower to pay off the mortgage sooner and save on the amount of interest paid during the life of the loan.
Who is a Current Account Mortgage Ideal For?
A current account mortgage may be a good choice for someone who has an outstanding balance on a mortgage payment and a significant amount built up in a savings account. Because the account is flexible enough to allow overpayments and underpayments, it is an optimal situation for someone who gets regular bonuses or is self employed without a steady income. The account holder can make large payments when a paycheck comes in and skip payments in months where there is less income.
Benefits of a Current Account Mortgage
There are a number of reasons to consider a current account mortgage, including:
- Less interest paid over the life of the loan
- Mortgage may be paid off sooner
- Overpayments and underpayments can be made without penalty
- Those who don’t have a consistent paycheck can make payments at convenient times
If you are serious about paying off your mortgage under your own terms, a current account mortgage might be an option to consider.
Drawbacks of a Current Account Mortgage
While current account mortgages work well for some individuals, they are not right for everyone. Some of the drawbacks of current account mortgages include:
- Many of these accounts charge a higher rate of interest than conventional mortgage loans
- The higher interest may not be offset sufficiently by the savings if there is not ample money in the savings account balance
- Many current account mortgages include variable rates of interest, which can make it difficult to budget accurately
- Because the rates tend to be higher, account holders may need to shop around and switch accounts regularly to get the best interest rate
When you find a current account mortgage that looks enticing, it is important to read the terms of the loan carefully to know exactly what you are getting. Ask how often the rate may change or if there are will be fees assessed.
You will also want to accurately calculate the amount of interest you would save against the increased interest rate that you would take on with a current account mortgage. This ensures the current account mortgage you choose would be the most financially beneficial to you.
When you open a current account, there may be additional features that you have the option of tacking onto your product. One such feature is overdraft facility, which protects you from overdrawing your account when you write a check use your debit card. This feature has been offered to businesses to help them expand their working capital. However, the popularity of overdraft has also trickled to personal accounts, allowing individuals the flexibility of an additional money source in months where funds might become tight.
Similar to Credit Cards?
Overdraft facility is very similar to credit cards in that you use as much money as you need, when you need it. You can then pay your balance back in full or in minimum monthly payments, with a payment structure that is explained when you are approved for your overdraft facility.
In some cases, banks might charge a fee for using the overdraft facility. There will also be interest charged on the outstanding balance, which may be significantly higher than the rate of a standard personal loan.
Overdraft facility is also similar to credit cards in the way that it is issued. While banks only give overdraft to customers who open current accounts, the amount of the overdraft will be dependent on the customer’s income level and credit history, just like credit cards.
The bank or building society may also evaluate a customer’s history with the institution when issuing overdraft facility. In some cases, a bank may issue a small overdraft and then consider raising the limit in the future when the customer has a proven track record of responsible use and timely payments.
Benefits of Overdraft Facility
There are a number of benefits of overdraft facility that should be considered when one is opening a current account that includes this feature. These include:
- Flexibility – Funds are available when you need them, in the precise amount you want.
- Protection – Overdraft facility can ensure your bills are covered in months when money is tight.
- Availability – Overdraft facility may be easier to get than other loans because the bank has flexibility in the amount they will approve.
- Cost – Overdraft only costs you money when you use it, so you control the fees involved with the service.
- Repayment – Pay the balance in minimum monthly payment or in full at any time without overpayment penalties.
The benefits of overdraft facility are enjoyed as long as the overdraft is used carefully and responsibly by the account holder. However, like other types of debt, overdraft facility can be misused and put the person into debt difficulty.
Drawbacks of Overdraft Facility
While there are many benefits to overdraft facility, there are some potential drawbacks as well, including:
- Expense – The fees and interest rate for using overdraft facility can be high.
- Misuse – Some account holders may run up an overdraft balance too high to be easily repaid.
Whether overdraft facility is right for you is a matter of personal choice. By learning the pros and cons of overdraft, you can make a thoughtful decision as to whether this is a good feature to add to your current account.
