Taking out a mortgage is becoming far more than just borrowing money to buy a house. Current account mortgages are expanding the bou ndaries and lenders want IFAs to come on board.
There are now four main lenders which provide flexible mortgages on a current acc ount basis – Halifax's Intell igent Finance, Virgin One, First Act ive and Woolwich.
With two of these lenders being major names in the high street, the profile of this mortgage product is being raised quickly.
The requirements of borrowers have changed over the last decade. In the late 80s and early 90s, consumers wanted to borrow as much money as they could for as long as possible. However, 21st Century consumers are looking to pay off their mortgage quickly and lenders say current account mortgages present a great opportunity to do this.
According to the four lenders, mer ging a borrower's current acc ount with their mortgage brings many benefits. Paying salaries and bon uses into a current account mortgage means that a borrower can benefit far more than they would from the usual current account where little interest is earned.
A credit balance offsets the amount of mortgage debt and reduces the amount of int erest charged by the lender. The borrower can then decide whether to maintain regular monthly payments and consistently overpay every month or just reduce the monthly payment each time.
However, rather than just focusing on mortgages, these vehicles can be used as savings vehicles or borrowers can take out loans in the form of drawdowns – all benefiting from the tax-efficient mortgage rate.
Many lenders see much of their business coming thr ough IFAs. Virgin One is currently a direct operation but it is also seeking to approach the IFA market.
Lenders believe this is an opportunity for IFAs to take a more proactive approach with all aspects of their clients' finances. They say IFAs can use this product as a tool to get clients to use their savings in a more tax-efficient way, not just relying on maximising Isa limits each year.
Intelligent Finance sales director Ian Jeffery says current account mortgages could add new revenue str eams for them by increasing their product ranges.
He also says IFAs should not just focus on the long-term investment needs of their clients because their medium and short-term needs merge into the long term.
But will everyone benefit from this product? Lenders agree that most first-time buyers would not be suited to it. Most of their take-up is from second-time buyers or consumers remortgaging their property.
Clients who are a bit more financially sophisticated are more likely to be attracted by this new innovation than more traditionally minded people. Professionals, such as accountants and solicitors, and the self-empl
oyed are seen as good prospects for this type of mortgage because they often get large bonuses which can be used to smooth out the year's earnings.
Charcol senior technical manager Ray Boulger says: “The more a person's net liquid debt fluctuates, the more value they will get from current account mortgages. Without that degree of volatility, people are better off going for a different type of mortgage and having their savings in an Isa.
“Someone borrowing a large amount is likely to have a comparatively volatile current account but you have to put the size of the mortgage against this volatility and take the two in perspective.”
There are two different types of current account mortgage available.
One type puts the mortgage, the current account and the savings into separate pots to provide a clear picture of the borrowers' finances.
The other type is an acc ount where the mortgage and the current account are represented in one balance, almost like a big overdraft. This potentially can make it very confusing for borrowers to establish whether they have overspent each month.
However, Virgin One marketing manager Scott Mow bray says putting everything in one pot adds clarity and simplicity for the borrower as they know exactly what their balance is.
IFAs question the freedom to change monthly mortgage payments and make drawdowns when necessary, as this facility leaves the door open to imprudent borrowers extending their original loan and borrowing more than they can afford to repay.
But Jeffery says len ders use monitoring systems to ensure people cannot borrow more than they can afford.
He says: “Lenders est ablish an affordability model which is in the consumer's interest and allows personal circumstances to be accoun ted for.”
Current account mortga ges provide an additional opp ortunity for IFAs to broa den their product bases but they will only benefit certain clients.
Not all borrowers want total flexibility in their mortgage and the ability to overpay is an option available through other non-flexible mortgages. However, for clients nearing retirement, looking to pay off their debt quickly or looking to consolidate their finances this product could provide an attractive new option.