Want to reduce your home loan by £50,000? Then making regular overpayments on a flexible mortgage should be your goal this season, writes Paula John of Your Mortgage magazine
Since they arrived from Australia six years ago flexible mortgages have transformed the UK property-purchasing market with consumer-friendly features such as overpayments, underpayments, payment holidays and the facility to borrow back overpayments. But it is really the option to overpay that makes most sense. For example, if you were to pay an additional £50 on top of your usual monthly payments with a £50,000 interest-only mortgage, at a rate of seven per cent, with Skipton Building Society, you would be able to pay your mortgage off six years and eight months in advance while saving £25,478 in interest. While if you were to pay an extra £100 a month you would be able to pay off your mortgage 10 years and three months ahead of schedule and save £45,510 in interest. Not a bad saving for paying just over £3 extra a day.
How you CAM save
Current Account Mortgages (CAMs) allow the borrower the same benefits as a flexible home loan but with one added extra. With a CAM you can combine your salary, savings and in some cases your credit cards and personal loans with your mortgage and run all your finances in a single account, which could be more convenient for you. As with an ordinary current account you can still withdraw money as and when you please. But at the same time your mortgage debt will be further reduced because instead of paying interest on the whole of your mortgage you only pay interest on the difference between your mortgage debt and your savings. Your savings will work harder for you saving money at the mortgage rate than they would earning money in a traditional savings account.
And if you pay your salary into your CAM each month the total amount you could reduce your mortgage by is particularly impressive. ‘By paying your salary into your CAM you can overpay by default,’ says Matt Smith, head of marketing at Britannic Money. ‘Instead of earning little or no interest the money that you would normally have left in your current account at the end of each month can have a dramatic effect on the amount that you owe on your mortgage. Choosing to pay your salary into a CAM is a painless way of reducing your mortgage debt and paying it off perhaps years in advance.’
Separately together
Another new type of flexible home loan, the offset mortgage, also allows the borrower to combine all their finances together. However, unlike a CAM, your mortgage, savings and salary all remain in separate accounts. At the end of the day a virtual sweep is done automatically to make sure your money earns the best rate of return. For some borrowers this method may be easier to follow than a CAM. ‘With an offset mortgage borrowers can adapt their budget and funds to suit changes in their circumstances,’ says Northern Rock spokesperson Ron Stout. ‘Basically they are a great way of making
your money work efficiently for you.’ Northern Rock's Together Connections offset mortgage allows you to make overpayments on both your mortgage and any personal loans you might have. For example if you paid £50 extra a month on a 25-year £65,000 repayment mortgage at 6.99 per cent combined with a personal loan of £18,000 more you would reduce your mortgage and personal loan term by three years and six months and save £16,320 in interest.
The flexible future
Flexible mortgages, CAMs and offsets may be tipped to be the home loans of the future but with talk of a possible recession also looming on the horizon, is it really worth overpaying on your mortgage at this time? ‘If a recession is imminent it could be a good idea to overpay on your mortgage now because you will be minimising your debt,’ observes Britannic Money's Smith. ‘Flexible mortgages are just as relevant when times are bad as they are when they are good because you can borrow back any overpayments you have made and take a break from paying your mortgage if you need to.’ Although flexible mortgages may well be recession-proof it is important to remember that they are not suitable for everybody. This type of mortgage will be of little use to those borrowers who run their current account in the red every
month or have little or no savings.