Save and borrow in harmony

intense competition among lenders means getting a mortgage has never been easier - or more complicated. Lenders are falling over each other to woo borrowers, but the array of deals on offer makes it harder to pick the right loan.

Flexible mortgages, now offered by dozens of lenders, are gaining in popularity. In its simplest form, a flexible mortgage allows you to over- or underpay your mortgage each month, take payment holidays and to borrow back the extra you have repaid if you need to.

But for those who want to save on their mortgage, the next step - a current account or offset mortgage - might be a better bet, providing you are sufficiently organised to manage the loan properly.

In essence a current account mortgage combines a flexible mortgage with a current account and a savings account. The two best-known fully fledged current account mortgages are offered by Virgin One, with a minimum loan of ?50,000 and Britannic Money, where the minimum is ?25,000.

The loans work by using your savings and salary to chip away at your debt. In theory, this should enable you to clear your mortgage more quickly and to pay less interest in the process.



With an ?80,000 mortgage and ?5,000 in a savings account you would only pay interest on ?75,000. When your salary hits your account, it reduces your mortgage further. As you spend your salary, your mortgage debt rises again, but in the meantime you save on interest because for much of the time your overall debt is lower than it would otherwise be. Moreover, if you need money for a new car or a holiday, say, you will not need expensive loans or credit cards.



On the downside, current account mortgage borrowers do not earn interest on savings. But overall, you should be better off because savings rates tend to be much lower than borrowing costs. In the example above, you might be paying mortgage interest of 6.2 per cent a year. This wouldn't be payable on your savings of ?5,000, and the best interest rate achievable on this money would currently be around 5 per cent before tax. Higher-rate taxpayers make bigger savings as this 5 per cent is worth just 3 per cent after the Inland Revenue takes its cut.



For those unhappy at lumping everything together in one account, an offset mortgage might be better. These work in the same way as current account loans in that your savings are credited against your mortgage, but everything is kept separate.



Woolwich, Intelligent Finance, Egg and Northern Rock already offer such loans and last month, First Direct, owned by HSBC, launched its version of an offset plan. Both Barclays and HSBC itself also plan to join the market. Intelligent Finance estimates that integrated banking could save people with mortgages and savings more than ?1 billion in tax.



A recent report from the Consumers' Association warns that these loans do not suit everyone. It concludes: 'An all-in-one account won't necessarily save you money. Interest rates on these accounts are often higher than on traditional mortgages and they tend to have poorer introductory deals.'



It all depends on your levels of savings and borrowing. Scott Mowbray, marketing manager at Virgin One, says: 'Current account mortgages can save money for the vast majority of home owners. Our research (carried out by NOP and validated by the London Business School) shows that eight out of 10 homes with combined borrowings of ?50,000 or more would be better off with a current account mortgage.'



There are differences between the deals on offer. For example, at Intelligent Finance you do not have to mandate your salary to the account and you do not have to have a mortgage. At Egg, you cannot make underpayments.

David Hollingworth, a mortgage specialist at broker London & Country says: 'These schemes are good for those who use the flexible features, and they offer good effective savings rates for higher-rate tax payers.' But he warns that you could lose out if you pay for facilities you do not use. Currently, rates on current account and offset mortgages range from 5.75 to 6.7 per cent a year. In contrast, the best introductory discounts on conventional mortgages bring the rates down to below 5 per cent in the early years of loans.



Ray Boulger of independent mortgage adviser Charcol, says: 'The key point is the rate and whether you are going to make good use of the scheme. If you do not like the idea of a huge overdraft, go for an offset scheme rather than a current account mortgage.' Boulger picks Intelligent Finance, whose mortgage costs 5.75 per cent, and Woolwich Open Plan, where you pay Bank of England base rates plus 0.75 percentage points for the lifetime of the loan, as the best deals currently on offer.





Current account mortgages: the lowdown

The pros
o You can make overpayments, underpayments, take payment holidays and borrow more money if you need to.
o Your savings are used to offset your loan, which saves you interest.
o Your interest is calculated daily and on all-in-one current account mortgages your salary is also offset against your loan while it is in your account. o There are no redemption penalties.

The cons
o The interest rate is likely to be higher than the best discounted or fixed rates on the market.
o You need financial discipline to ensure you pay off the loan - otherwise you will end up with a huge debt.
o Interest rates are variable so you need to keep an eye on the rates to make sure that you are not unwittingly adding to your debt.
o If you do not use the flexible features you could be paying over the odds.

Useful contacts: Britannic Money, 0845 700 4422, www.britannicmoney.com; Charcol, 0800 718191, www.charcolonline.co.uk; Intelligent Finance, www.if.com, 0845 609 4343; London & Country, 0800 373300, www.lcplc.co.uk; Virgin One, www.virginone.com, 08456 000 001.

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