Current Account mortgages – A good way to use a credit card against a mortgage

Credit cards and mortgages are not seen as natural partners.  Credit cards can be one of the more expensive forms of borrowing while mortgages are one of the cheapest.

One of the warning signs that a home owner’s finances are in trouble are that credit cards are being used to pay a mortgage off.  This is essentially shuffling lower interest debt to higher interest debt, and the greater use of credit cards to pay off mortgages has been one of the most accurate advanced signs of the recession. However, not all mingling of mortgage and credit card payments are quite so ominous for a card holder.

Current account mortgages are a respectable way of marrying credit cards and mortgages.  Current account mortgages effectively put all finances into one pot.  This means that savings, which typically get lower rates of interest than are paid on mortgages, will instead get a larger interest payment while also getting a tax advantage as the interest that is not paid is after tax while the interest on the savings is before tax.

Higher interest loans also benefit from the pooling together of all accounts.  This includes unsecured consumer loans and credit card offsets.  Because consumer loans and credit cards are typically charged higher rates they tend to be much cheaper when set off against a mortgage.  As the interest is worked out daily, and the account operates like a current account, there is no extra burden for the bank to allow a payment card to be used against the account as well.

There are some issues with current account mortgages.  Firstly, they are charged a higher rate than a normal mortgage as they have a higher degree of flexibility.  The savings that can be got on the savings and credit cards could be offset by the higher interest rates charged on the mortgage.  Offset mortgages are also secured against a house, in contrast to a credit card debt.  There is also no interest free grace period as there is with a credit card.

One way to have the best of both worlds is to get a separate credit card account from a current account mortgage, but to pay it off in full using a direct debit.  This will mean that there is still an interest free grace period and there is less chance of losing a house, but the mortgage is still being used against credit card borrowing.