Money: Whether you borrow or save, the rate's the same
Sunday 26 September 1999
Now a handful of new mortgage products are offering the same rate of interest regardless of whether you borrow or save.
Bank account mortgages combine the lending for your home with full current account facilities and are available from three lenders: Virgin, First Active and Kleinwort Benson. Virgin received more than 4,200 applications worth pounds 400m in July and August for its One account, while First Active reports more than 100 per cent year-on-year growth in sales since April 1997. Kleinwort Benson targets the wealthy end of the market: you need a minimum annual income of pounds 100,000 to qualify.
The key difference with current account mortgages is that instead of keeping current, deposit and loan accounts separate from the mortgage, you combine all daily finances into a single account - all subject to the same interest. Rates are competitive as they are based on the least risky form of borrowing, the mortgage.
As with any other home loan, you arrange a bank account mortgage when you buy a home and the lender draws up a sche-dule of monthly repayments.
The difference is that because this is also your bank account, you are putting your monthly income into the mortgage, plus any windfalls, bonuses or savings. Each time you do so, the outstanding mortgage debt is reduced and the interest payable recalculated.
Money that might otherwise earn zero interest can help reduce the interest paid on your mortgage. Because interest is recalculated daily, even having your salary sitting in the account for a couple of days can save you money. Virgin calculates that somebody earning pounds 35,000 a year would save pounds 4,733 in interest repayments on a pounds 70,000 loan and cut their 25-year mortgage term by 10 months, simply by paying their salary into the account.
These loans also allow you to overpay at any time. That same person borrowing pounds 70,000 at 6.45 per cent and paying an extra pounds 50 a month would cut the total interest paid over the term from pounds 62,142 to pounds 48,132. This would also clear the mortgage five and a half years early.
Current account mortgages give you most of the ordinary banking facilities, including a cheque book and cash or credit cards. A monthly statement details all transactions.
You are free to draw on the account up to your originally agreed borrowing limit. So if you need to take out a loan to buy a car you will pay little more than 6 per cent interest, compared with twice that rate for a personal loan.
This ability to draw from the account provides an advantage over flexible mortgages, offered in different guises by many lenders. These allow you to underpay, overpay or take a payment holiday, but most do not let you increase borrowings.
The freedom offered by current account mortgages also means you are free to get into trouble. If you have a tendency to run up large credit-card bills or other debts you should steer well clear; you may see your mortgage debt increase and your term lengthen.
You can also pay interest slightly over the odds on current account mortgages. Virgin charges 6.95 per cent variable if you put down a 5 to 10 per cent deposit, falling to 6.35 per cent with a 50 per cent deposit. First Active is offering discounted variable rates of between 3.49 and 4.24 per cent until 31 March next year, with variable rates thereafter of between 6.74 and 7.49 per cent.
Current account mortgages will suit those with erratic income, the self- employed and the self-disciplined who want to pay their mortgage off quickly.
n Contacts: First Active, 0345 004422; Kleinwort Benson, 0800 317477; Virgin One, 08456 000001.
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