Current account (or offset) mortgages link your savings and debt. Borrowers pay interest only on the difference between the amount in their current account and the principal left on their home loan. So rather than earn a low rate of interest on their savings, borrowers can cut the amount they pay on the loan.
Used wisely, these accounts allow you to save thousands in interest and potentially reduce the term of your mortgage.
A couple with a 25-year, €500,000 standard mortgage who earn €5,000 net a month and have €4,000 expenses each month can shave nine years and seven months off their mortgage, saving €97,807.09, by using a First Active current account mortgage.
First Active launched its product in Ireland a few years ago. National Irish Bank recently introduced its own offset mortgage. The products differ slightly, as the balance in only one First Active current account is set against the mortgage balance, whereas the money in up to six current accounts and six savings accounts can be set against up to six mortgages through National Irish Bank.
Mortgage brokers are sharply divided when it comes to offset mortgages, however. Tice O’Sullivan of the mortgage intermediary PrimaFinance.ie says he genuinely can’t think of a type of customer that these products would suit ideally. “Compared with the First Active mortgage, someone could up their monthly mortgage payment by €50 a month on a 3.1% tracker and get the same benefits and pay the same total interest over the term of the loan,” he said.
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On the other hand, James Byrne of the mortgage intermediary EZHome says these products can work well for some. “Those with a large lump sum, couples with a good double income and those who are qualified to manage cash flow should do well,” he said, but adds that eight out of 10 customers won’t fit such criteria.
Sarah Wellband of REA Mortgage Choice likes the products so much that she has one herself. Offset mortgages work, she says, “as long as you can keep your money in the account and don’t go spending it”. Interest is calculated every day, so the higher the amount on deposit and the longer you leave it, the more you benefit.
Astute borrowers maximise these accounts’ features through clever timing, says Byrne. Salary and other income, such as rents and dividends, enter the account at the start of each month. Outgoings are scheduled for the end of the month, ensuring that the daily interest calculation is made on as high a deposit as possible.
For those trying to decide whether to save their surplus cash or offset it against a mortgage, the latter option carries the benefit of being Dirt-free, which should mean it is the better choice even if the deposit interest rate and mortgage rate are the same.
O’Sullivan, however, is cautious. “Be realistic about it. There is good credit on the day the pay cheque hits the account, but that will be quickly whittled down over the month. Most people do not have much excess in their current account, and if they do, they should be doing something else with it.”
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The current accounts tied to National Irish Bank’s product are full service, but at present the First Active current account mortgage does not offer a chequebook, although customers can request a cheque if they need one.
Another offset mortgage disadvantage is that they are currently available only as variable-rate products. Should customers wish to switch to a fixed rate, they would have to change mortgage products.
This situation may change over the next year, however, according to Raymond Holmes, a business development project manager at National Irish Bank. “We decided to get our product out as soon as possible,” he said. “We are looking at a fixed-rate product or putting the offset mortgage against our ECB (European Central Bank) tracker.”
AIB and Bank of Ireland have no plans to introduce current account mortgages and think their flexibility is over-rated. AIB’s rate matches First Active’s current account mortgage rate. Bank of Ireland is more expensive.
First Active’s current account mortgage rate is 3.3% APR, with a guarantee that it will not exceed the ECB base rate by more than 1.5%.
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Customers who take out a National Irish Bank offset mortgage will be on one of three interest rates, depending on the amount they borrow. For loans from €50,000 to €99,999, the rate is 3.2% APR, falling to 3.1% APR for €100,000- €349,999 loans and 3% APR for €350,000 and above.
Borrowers who want the lowest possible rate should stick to trackers. National Irish Bank’s tracker is 2.85% APR, while Ulster Bank offers 2.9% APR with promises not to go more than 0.85% above the ECB rate. Bank of Ireland comes in just above this level at 3.14% APR, with a guarantee to rise no more than 1.1% above the ECB.
Paying your mortgage off early always has the benefit of saving on interest and cutting the loan term, whether you do so through an offset product, regular overpayments or occasional lump sums. Anyone considering a loan should consult a fee-based independent adviser to discover which, if any, of these options is right for them.