Bank savings mortgage

How does a bank savings mortgage work?

A bank savings mortgage links a loan to a blocked savings account. Your monthly payment breaks down into two parts: interest on the loan, and a deposit into that savings account. The loan itself you leave untouched during the term. Instead you watch your savings balance grow, and with that accumulated amount you repay the entire mortgage in one go at the end.

The clever bit is in the rate: you earn exactly the same interest on your savings as you pay on the loan. If the mortgage rate goes up, your savings pot grows faster. If it falls, you deposit a little more. Either way, you know in advance where your final amount will land.

Important tax rules

You can no longer take out a new bank savings mortgage with the right to mortgage interest relief; that stopped on 1 January 2013. So the type mainly still matters for anyone who already had one before that date and continues or adjusts it. Count on a minimum term of around 15 to 20 years. Stop earlier and it can cost you on the tax side.

Pros and cons

Pros

• The loan stays the same during the term, so maximum benefit from interest relief (within the transitional rules).
• The final amount is fixed: you know exactly what you are saving towards.
• A higher mortgage rate is partly offset by a higher savings rate.

Cons

• No longer available as a new mortgage with interest relief.
• Limited flexibility and hard to refinance to another provider.
• Sensitive to changes in laws and regulations.

Is a bank savings mortgage right for you?

If you are buying a home now, the bank savings mortgage usually drops out because of the tax rules. If you already have one, it is a different story: when you move, refinance or adjust it, you can lose accrued rights without even noticing. So get advice before you change anything, so you do not leave anything on the table.