Guernsey 'lifestyle' mortgage puts borrowers in the driving seat

PROFESSIONALS with a high level of income are being given more control over their finances through a flexible mortgage introduced by Butterfield Bank (Guernsey) Limited for the local market.

The Current Account Mortgage is designed to suit a professional lifestyle and coupled with its online banking service gives borrowers plenty of flexibility when managing their mortgage and other finances.

The online banking facility means that payments can be made out of the account 24 hours a day, seven days a week, at the borrower's discretion.

The current account mortgage, sometimes termed a 'lifestyle' mortgage, offset mortgage or intelligent finance, was conceived for professionals with surplus income, particularly those who receive a large profit share or bonus in addition to their annual salary.

Put simply, the mortgage is treated like a large overdraft against a property.

A mortgage limit, similar to an overdraft one, is set and the borrower's salary and any other income are paid into the account, while standing orders, cheques and direct debits can be paid just like a normal current account.

But the attractive element of the current account mortgage is that interest, which is calculated daily, is paid only on the amount outstanding each day.

With this in mind, instead of keeping funds in a traditional bank current account, typically earning very low interest, these can be used to reduce the mortgage balance, thereby saving interest at the mortgage interest rate.

For example, on a £300,000 mortgage, if you have available funds of £20,000, these can be placed in the current account mortgage account and interest will be paid only on £280,000.

'It's a way of making your deposit balances work harder for you whilst simultaneously reducing your mortgage borrowings,' said Mark Stevens, head of lending services at the bank.

'Our experience shows that with surplus income, borrowers are able to pay off their mortgage way ahead of schedule, thereby making a substantial interest saving.'

At the outset, the borrower is set a maximum borrowing limit and this reduces each year, in line with capital and interest repayments based over a maximum term of 25 years.

In the bank's experience, borrowers soon find themselves ahead of schedule in terms of repayment. After a period of time, if the borrower is ahead of schedule, there is the flexibility to withdraw funds from the account to make a large purchase, such as a car, boat or luxury holiday, so long as the borrowing does not exceed the agreed limit.

In normal circumstances, borrowers might apply for a personal unsecured loan, which would attract a premium rate of interest. Drawing under the current account mortgage instead of raising separate personal unsecured finance is a more cost-effective means of raising finance because mortgage interest rates are typically lower.

It is a concept that was first developed in Australia where most people have one bank account based around their mortgage.

Butterfield is believed to be the only Guernsey bank that provides an online mortgage product such as that which also allows the borrower to make third-party payments away from the account online.

Current account mortgages are available for owner-occupied properties.

The minimum mortgage amount is £350,000 and an arrangement fee of £350 is charged.

The mortgage rate is currently 6.125% per annum and finance is available for up to 80% of the purchase price or valuation, whichever is the lower, with a term of up to 25 years or retirement age.

Clients are also allocated a dedicated and experienced relationship manager.

'Unlike many mortgage products available, the current account mortgage does not include onerous clauses such as lock-in agreements, penalty clauses for overpayments or early repayment and does not levy additional fees throughout the term of the loan – provided there are no amendments to the terms,' added Mr Stevens.

A lifestyle mortgage example, based on a 25-year term, is that if you have annual gross income of £100,000 and a bonus of £10,000 with monthly expenses running at £4,400 on a mortgage of £400,000 – at the bank's rate of 6.125% per annum the potential interest savings are in excess of £120,000 – reducing the term of the mortgage by seven years.