Current account mortgages (CAMs) and offset mortgages offer you flexibility across all your finances. Here’s how they work, says Your Mortgage magazine.
With a CAM, you run all of your finances through a single account – your mortgage, current account, savings and personal loans. Any unspent income you have in your current account at the end of the month is automatically taken off the mortgage debt you owe.
So say your monthly take-home pay is £2,000 and your total outgoings for the month are £1,800, the £200 left over comes straight off your mortgage, and you are immediately paying interest on a smaller amount of debt. And any savings you have are offset against any borrowings.
In addition to this you can access your savings or overpayments whenever you like without having to inform your lender. Again, a CAM has all the features of a flexible mortgage, with added convenience because all of your money automatically works harder for you. It genuinely allows the customer to take full responsibility for repaying their mortgage, and permits the more financially aware borrower to save time and money over the term of their loan.
According to research by Virgin One, eight out of ten homes in the UK with combined borrowings of £50,000 or more would be better off with a CAM than a traditional mortgage, saving interest on average of £16,713 and paying off their mortgage ten years early. The aim is that the mortgage will be repaid before the borrower retires. As long as that is on course there is nothing much wrong with a borrower increasing his or her borrowings by withdrawing from the current account. For this purpose, the lender will issue a chequebook to enable money to be withdrawn for any purpose. The only rule is that the maximum borrowing limit is not exceeded.
Other rules for setting up a current account mortgage are normally that the lender will require a borrower’s salary to be paid into the account each month. The lender will calculate interest on a daily basis. At the end of the month, any money that is left over after the usual outgoings have been deducted reduces the balance outstanding on the account. As long as this outstanding balance is regularly reduced, the process is much the same as making overpayments into an ordinary flexible mortgage, allowing you to potentially save thousands of pounds during the life of the mortgage.
In general, you will find that you pay for the flexibility of a current account mortgage through being charged a higher rate of interest than more traditional mortgages, as the lenders lose money the quicker you pay it back. However, if you learn to manage this type of mortgage well, then it could benefit both you and your lender.
Before you take out a current account mortgage it is important to make sure that you are the right person for it. A CAM requires a great amount of discipline, not just in order to enjoy the savings that are possible should you make overpayments, but also to just pay off the balance itself before you retire.