Debit cards are now commonplace with mortgage accounts, giving the account holder the ability to withdraw funds or make purchases through the mortgage account. This makes sense for the bank, and it can make sense for the mortgage account holder, as well. However it is a good idea to be aware that a debit card associated with a mortgage account can be quite different from a debit card associated with a transaction account.
When debit cards first appeared they tended to be offered with transaction accounts. Transaction accounts were the ones geared for balance fluctuations with purchases and payments, and so this made sense for debit cards to be with these accounts. Debit cards were also seen as a replacement for cheques, which tended to be offered with transaction accounts, increasing the association in people’s minds.
However, because of the way they’re processed, debit cards are unique and yet have features in common with both cheques and credit cards. The financial institution which issues the debit card charges the merchant a percentage of the transaction to cover the cost of processing the purchase. This means the merchant often gets more purchases out of a shopper than if they were carrying cash, and more chance of an impulse buy than if they were carrying a cheque book.
Therefore, unlike cheques and ATM withdrawals, debit card payments can actually make a profit for the issuing bank or credit union. For this reason debit cards are now offered by a range of bank accounts, including line of credit facilities, savings accounts, and cash accounts held with stock brokers.
Some mortgages are a natural fit for a debit card. There are three main types, the flexible mortgage, the offset mortgage, and the redraw mortgage. These can all be considerably cheaper ways of borrowing than credit card spending. However there are some dangers with each.
With flexible mortgages there is the danger that the mortgage will stay higher than it would if the spending was done through a traditional transaction account. With a transaction account it is quite easy for a person to see what their outgoing costs are, and whether those costs match the income from the same time period. This can be harder for a mortgage which is a large debt, and can be hard to compare month to month. Offset mortgages have a similar issue.
Redraw mortgages also have a problem with redraw fees. Although some mortgages do not have a fee for exercising redraw rights, others do, raising the cost of the debit card transaction for the account holder.
