Mortgages that save thousands

Next week, telephone and online bank First Direct will become the latest player to launch a current account mortgage.

This type of home loan typically allows you to offset savings cash and money in your current account against your mortgage, which reduces your interest payments. They are still something of a niche product but are growing in popularity.

Current account mortgages were pioneered in this country by Richard Branson's Virgin One, and First Active (now Britannic Money). In the past few years, a number of rivals have launched them, including the Woolwich, whose Open Plan is one of the best-known, Northern Rock and phone and internet bank Intelligent Finance.

These deals can definitely save people money but it can be quite hard to understand how they work. Another big drawback is that to get the best out of them, you usually have to move your current account, mortgage and any other savings and borrowings all to the same provider.

There are different sorts of current account mortgages, too. With Virgin One's, for example, you pool your current account and home loan into a single all-in-one account. With others, such as First Direct's Smartmortgage, which is launched on Monday, you keep your current account and savings account cash and borrowings in separate accounts (all with the same provider) and these accounts are then linked for interest purposes.

People who have a fair amount in savings accounts or their current account have the most to gain from these mortgages, because they use people's income and savings to automatically reduce the amount of interest they pay.

Smartmortgage's interest rate is currently 6% and there is a promise that customers will pay no more than 1% above the Bank of England base rate until at least December 31, 2004.

"In most cases, customers will be better off by thousands of pounds," claims First Direct. The deal is available to anyone (though the minimum mortgage size is £50,000), but the bank will initially be promoting it to its 1m existing customers.

There is no arrangement fee but there is a £195 remortgage fee.