Are you looking for an ordinary mortgage? Or do you feel the need for something more flexible?
In recent years a few of these more flexible products have come on to the market. Your mortgage broker can introduce you to a range of them. There are two main types: current account mortgage and offser mortgage.
1. Current Account Mortgage. A current account mortgage combines your mortgage and your current account into a single balance. Your mortgage broker will help you to understand how it works. Basically, suppose you have £3,000 in your current account and a mortgage of £93,000. With a current account mortgage you would be regarded as being £90,000 overdrawn and would pay interest on the “overdraft”. Obviously the level of your “overdraft” varies from day to day according to what goes into your current account and what you spend – it will presumably be smallest on the day your salary is paid in. You make a standard payment every month towards clearing your mortgage. But if you spend less than your income every month, what remains acts as an overpayment and you clear your mortgage more quickly.
2. Offset Mortgage. An offset mortgage is similar to a Current Account Mortgage, but includes your savings account. Again, the way it works is quite complicated, so ask your mortgage broker about it. In this case, your mortgage balance is offset by your savings. So if you have a mortgage of £120,000 and savings of £20,000, you only pay interest on the £100,000 difference. Your savings will probably fluctuate less than your current account balance, so they act as a permanent overpayment. This way you should clear mortgage earlier.
Both these types of mortgage have both pros and cons. So you really need to discuss them with your mortgage broker before committing yourself.
Pros
• If you use these mortgages in the way they are designed to be used, you are overpaying your mortgage every month so you can hope to pay off your mortgage faster.
• These mortgages can be particularly helpful for the self-employed, or people on commission or bonus schemes.
• The offset mortgage is very tax-efficient, especially for higher-rate tax-payers.
Cons
• The interest rate is higher than on standard mortgages.
• You need to be extremely well organised with your money! If this is not your strong point, perhaps these mortgages are not for you.
• The Current Account Mortgage in particular can create a feeling of being permanently overdrawn, which can be quite depressing.
• If you are only interested in using one of these mortgages in order to overpay, remember that most mortgages nowadays allow overpayment. So you could use a standard mortgage with a lower interest rate.
Many people find a flexible mortgage an excellent product but they aren’t for everyone. If you are interested, make sure you discuss the pros and cons with your mortgage broker, to find out if it’s the right thing for you.
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