CAM / Offset mortgages
Current Account Mortgages and Offset mortgages
Current Account Mortgages (CAMs) and Offset mortgage have the features of flexible mortgages, such as over and underpayment facilities, but your finances are linked so that debits and credits can be offset against each other.
As with all flexible products, you need to be good at controlling and understanding your finances to make full use of the features on offer.
Current Account Mortgages
CAMs work in a very similar way to offset mortgages, but rather than having separate current and savings accounts and mortgage debt, they are amalgamated into one account. You are then given a single cheque book and debit card.
Rather than paying off the debt by making monthly repayments, any money paid into the accounts reduces the amount you owe – lenders normally stipulate that you pay your salary into the account. Again, this lowers the interest on the mortgage, which could mean paying it off early and thousands of pounds worth of interest savings.
All-in-one finances: An important aspect that you need to get used to if you take on a CAM or Offset mortgage is that the balance of your account will always look as though it is many of thousands of pounds overdrawn – which can be a shock when you first visit the cashpoint. But you lender will be able to show you how your finances break down to make it less intimidating and show you that your mortgage debt is actually reducing.
For example, your mortgage might make your account look as if it is £75,000 overdrawn. If you also have £5000 in personal loans, this then increases to £80,000. However, add on savings of £5000 and £1000 already in your current account and your balance becomes £74,000 overdrawn.
Cheaper borrowing: The biggest advantage of a CAM lies in the borrowing. Unlike some offsets, a CAM allows all your borrowing to be conducted at one single mortgage interest rate, which will be considerably lower than personal loan rates, credit cards and overdraft charges.
This means you can effectively borrow up to 99% of your property value – though this amount varies – at any time. However, borrowing tens of thousands of pounds against the security of your house could lead to serious problems if you have to struggle to repay debts under normal circumstances.
With an offset mortgage, all your finances are linked, so your current account, mortgage and savings are held with the same lender. This can include credit cards and personal loans. Unlike CAMs, however, all accounts are separate from one another.
What this means is that any accounts in credit are offset against the debit ones, for example your mortgage. So instead of being paid interest on your savings and current account, you don’t pay interest on the equivalent amount on your mortgage debt. If, for example, you have a mortgage of £100,000, having £1000 in your current account and £7000 of savings and offsetting these against your mortgage, you only pay interest on the remaining £92,000.
Daily interest adjustment: As with standard flexibles, your interest is adjusted daily, so your current account and savings are helping reduce your mortgage balance every day. Ultimately, you pay less interest because the interest on your mortgage is reduced, which in turn shortens your mortgage term or reduces your monthly payments.
Tax advantages: One definite perk of an offset mortgage is that you can make substantial tax savings. As you don’t receive any interest on your savings, you don’t have to pay tax on them either. All your interest is going to help reduce the interest on the mortgage debt. This is something that is likely to appeal to higher rate tax payers.
Capital repayments: As long as you cover the interest due on the mortgage each month, you should have the flexibility to repay the mortgage however you want. This can be done as either a traditional capital repayment with a direct debit from your current account to your mortgage or you can arrange an ISA (individual savings account) or endowment policy to repay the mortgage.
Effects of offsetting (in monetary terms)
A £100,000 interest-only mortgage with a term over 20 years at a rate of 5.75% costs £479.17 per month. The total cost of borrowing is £215,199. If the borrower has £100,000 of savings and continues with the repayments at £479.17 the mortgage term falls to 16 years and four months. The total cost of borrowing falls to £193,703, giving a saving of £21,496.
The alternative is to keep the 20 year term and enjoy lower monthly payments of £431.25, bringing the total cost of borrowing down to £203,699.
Information source: Mortgage Advisor & Home Buyer publication and First Direct