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CAM and Offset mortgages

Current account mortgages (CAMs) and offset mortgages have the features of standard flexible
mortgages, such as over and underpayment facilities, but your finances are linked so that your debt and credit 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.

OFFSETS

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. 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 of your mortgage debt.
 
If, for example, you have a mortgage of £100,000, by 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 effectively helping to reduce your mortgage 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 perk 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. This is likely to appeal to higher rate
taxpayers in particular.
 
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.

CAMS

CAMs work in a similar way to offset mortgages but rather than having separate current and savings accounts and mortgage debt, they are amalgamated into one account. Rather than paying off the debt by making monthly repayments, any money paid into the account 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 saving thousands in interest.

All-in-one finances: An important aspect you need to get used to is that the balance of your account will always look as though it’s thousands of pounds overdrawn. But your lender will be able to show you how your finances break down to bring it all into perspective and show how the mortgage debt is actually reducing.

For example, your mortgage might make your account look as if it’s £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 in your current account and your balance overall becomes £74,000 overdrawn.

Cheaper borrowing: The biggest advantage of a CAM lies in borrowing. Unlike some offsets, a CAM
allows all your borrowing to be conducted at one single mortgage interest rate, which will be far
lower than personal loan and credit card rates and overdraft charges. This means you can effectively borrow as much as 99% of your property’s value – although this amount varies – at any time. However, borrowing tens of thousands of pounds against your house could lead to serious problems if you usually struggle to repay debts. Current account and offset mortgages link with your other finances to save you money
 
Need to know

 

Source: Mortgage Advisor & Home Buyer magazine