Current account remortgages

Current account remortgages explained

Current Account or Off-Set remortgage

A variation of the Flexible remortgage is known as the Current Account remortgage. The current account and remortgage account balances are offset against each other for the purposes of calculating interest on a remortgage

An offset remortgage is a type of remortgage common in the United Kingdom used for the purchase of domestic property.  The key feature of an offset remortgage is the ability to reduce the interest charged by offsetting a credit balance against the remortgage debt. For example, if the remortgage balance is £200,000 and the credit balance is £50,000, interest is only charged on the net balance of £150,000.

Offset remortgage lenders

Lenders normally set a credit limit at the outset of the remortgage and allow borrowers to credit and redraw up to this limit and this limit may be periodically reviewed. The lender may place restrictions on the lending limits towards the end of the remortgage term with the aim of ensuring capital repayment. However many lenders allow full drawdown up to the end date of the remortgage where the loan must be repaid. This can cause great problems for undisciplined borrowers and those approaching retirement if the lender is unwilling to extend the term especially on the grounds of age. 

Current account remortgages

Some lenders have a single account for all transactions, this is often referred to as a current account remortgage or CAM.

Other lenders have multiple accounts. As a minimum there is a remortgage account and a deposit account. Often the lender allows multiple accounts for credit balances and sometimes for debit balances. These different accounts allow the borrowers to notionally split their money according to purpose whilst all accounts are offset each day against the remortgage debt.

Partial reconfigurations of the offset remortgage are being introduced in the United States, however due to differing US remortgage policies and accounting practices as well as US tax laws these programs are generally not effective

Within the UK offset remortgages are often marketed as offering 'tax efficient' savings. Interest generated within deposit accounts for UK residents is deemed income and is taxed at source (the rate has been 20% since 1983). Within an offset remortgage arrangement the notional 'credit' balance does not generate income but instead saves an amount of remortgage interest that would otherwise be charged. As no interest payment is made there is no tax charge.

Current account and offset variants

Within the UK, many remortgage lenders offer offset remortgages. They fight for their share of the market by offering extra features or variants to the basic offset remortgage concept.

For example, some lenders have offset remortgages with an interest only payment schedule and full monthly interest offset. This means that the monthly interest payable is based on the balance on the remortgage account less the balances in the deposit and savings accounts. This results in lower sums of interest being paid by the borrower each month.

In another common variant, the borrower pays off capital and interest each month as if the remortgage account were a standard Repayment remortgage (i.e. as if the offset arrangement did not exist). However, the interest charged to the remortgage account is less due to the offset arrangement, than the borrower actually pays each month. This means that the borrower effectively overpays the remortgage each month and pays off the remortgage account earlier than planned.

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