Current account mortgages, not to be confused with Offset mortgages, which are subtly different, combine your mortgage and your current account into one single account. An Offset mortgage doesn’t combine your accounts, it merely links them. Other than that they work in the same way in that the outstanding amount on your mortgage will be reduced by the amount that is in your current account.
If you prefer having a large amount of savings rather than reducing the balance on your mortgage this can be an attractive option as you can keep your savings in an easy to access account, but while they are there they will effectively also reduce the balance on your mortgage at the same time, which will reduce your mortgage payments as your interest will be calculated on the reduced value.
Current account mortgages allow you some flexibility in how you repay your mortgage. By offsetting your savings and whatever is in your current account you can potentially choose between reducing your monthly mortgage payments or maintaining the same level of payment and reducing the term over which you repay your mortgage and so pay it off sooner. Either option will lead to you paying less interest in the long term.
It is worth noting that you will not earn interest on any money that is held in your offset accounts so always check to see which way you will make the most of your money. If you are going to receive 0.5% interest on you savings, but you are repaying a mortgage with a 5% interest rate, you are going to be better off reducing the size of the mortgage by using your money in an offset account. Also, an offset account is only really worthwhile if you are going to have a reasonable amount of money in your current or savings accounts. If your income and outgoings mean that your current account gets down to the last few pounds every month then chances are you will get a better deal on an alternative scheme that offers you a lower interest rate.
There are a number of potential benefits of having an offset mortgage, with one particularly strong one being that it is possible, in some cases, to link a family member’s account so that their savings reduce your mortgage burden without them having to hand over any money physically and without losing access to their savings should they need them.