How do current account mortgages work?
The current account mortgage (CAM) was first launched in the UK in 1997. This type of mortgage means that the bank and mortgage account are run as one. The bank account is operated in the same way as any other bank account and comes with a cheque book and switch card. Salaries are paid directly into the account and simply used as required throughout the month. Whatever is paid into the bank account then reduces the outstanding balance on the mortgage.
What are the key benefits of a CAM?
Traditional loans from high street banks are being fast eclipsed by more flexible mortgages as borrowers demand loans that can change to suit their lifestyle needs. A CAM is simply the next step in this flexible evolution.
By combining a mortgage and current account, your clients can pay their salary directly into their account and make significant savings. Not only will they reduce their mortgage debt and interest outstanding, but money in their account will save them interest at the prevailing mortgage rate.
In summary the key benefits are:
• Daily interest: overpayments reduce the loan immediately.
• Overpayments: reduce the term and save interest.
• Underpayments: allows money to be used for other purposes.
• Payment holidays: taking a break from mortgage payments.
• Option to pay in salary: making money work harder for your clients.
• Full banking facilities: guaranteed access to overpayments.
• Monthly statements: clients can keep track of their finances.
• Online banking services: instant access for easy management of your clients’ accounts.
How much can clients save by taking out a current account mortgage?
Substantial savings can be made with a current account mortgage. For example, take a borrower with a £100k repayment loan over 25 years at an interest rate of 5.85% (two years fixed rate, reverting to a SVR of 5.74%), who pays in a salary of £1,500 each month. If he spends all his salary each month apart from his mortgage payment and £100, which he leaves in the account, he could save £27,697.69 over the term of the mortgage. The loan would also be paid off six years and four months early.
Combining a mortgage with a current account is relatively new to the UK market. Are consumers ready for such a radical concept?
Current account mortgages are not that new to the UK, the first was launched in 1997 and since then many lenders have launched into the market. While the concept is fairly radical, it would be unfair to say that consumers are not ready. Latest research shows a significant growth in consumer awareness and understanding of CAMs. Changes in working patterns, market and economic conditions as well as advancements in technology mean that borrowers have access to more information and the ability to shop around for the best deal. This has forced the change of pace, as even more traditional lenders like the Woolwich and Halifax have had to come on board and embrace the flexible concept to stay competitive.
CAMs are an extension to flexible mortgages and the growth of flexible mortgages has been outstanding ‘ independent research has highlighted that flexible loans are set to take a notable share of the market. Flexible mortgages account for almost a third (28%) of overall mortgage business in the UK with the figure expected to rise to a staggering 38% in the next 12 months.
CAM’s are complex products, so which clients should I recommend them to?
CAMs are not complex products at all, nor are they just suited to those who can afford to overpay. Great savings can be made by anyone who is happy with the idea of centralising their finances, as they can benefit in both time and money savings on their mortgage. CAM’s are also particularly suited to those clients with varying incomes, such as the self-employed or those who receive bonuses. Clients who have a high level savings elsewhere can also benefit from having a CAM as their savings can be used to offset their outstanding mortgage debt.
What are the risks associated with CAM’s?
A mortgage of any kind is a huge financial commitment and there are always risks involved ‘ so in that respect, CAM’s are no different to traditional mortgages. Many clients worry about ‘putting all their eggs in one basket’, however, combining their accounts can prove a worthwhile exercise in both time and interest saved.
A sensible way of controlling this risk is to opt for a product that only allows clients to borrow back to the value of their overpayments ‘ so the risk of becoming over-stretched is removed. A good product should also have prudent lending criteria, with each case assessed on an individual basis, therefore minimising the risk of arrears.
Which lenders offer current account mortgages? And what interest rates are typically charged?
The following lenders offer CAM mortgages:
Britannic Money Up to 95% Two-year fixed
loan to value rate from 5.85%
Clydesdale Bank Up to 90% Standard variable
loan to value rate from 5.24%
Virgin One Up to 95% Standard variable
loan to value rate from 5.70%
Yorkshire Bank Up to 90% Standard variable
loan to value rate from 5.24%