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Complete Guide to Mortgages |
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CAM & OFFSET Mortgages
Current account
mortgages (CAMs) and offset mortgages have all the
features of standard flexible mortgages, such as over and
underpayment facilities [see flexible mortgages section],
but your finances are amalgamated.
As with all flexible products, you need to be good at
controlling and understanding your finances in order 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 all held with
the same lender. This can also 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
on your mortgage debt. So, 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 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. A[[ your interest is going to help reduce the
interest on the mortgage debt. This is something that is
likely to appeal to higher rate taxpayers
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 either as a traditional capital repayment with
a direct debit from your current account to your mortgage
or you can arrange an ISA or endowment policy to repay the
mortgage.
CAMS:
CAMS work
in a very similar way to offsets but rather than
having separate current and savings accounts and mortgage
debt, they are amalgamated into one account. You are
issued with a single cheque book and a debit card.
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 thousands of pounds worth of interest savings.
All-In-one
finances:
Something
you need to get used to if you take on a CAM is that the
balance of your account will always look as though it is
many thousands of pounds overdrawn - which can be a shock
when you visit the cash point. But your lender will be
able to show you how your finances break down to make it
less intimidating and show you that the mortgage debt is
actually reducing.
For example, your mortgage might make your account £75,000
overdrawn. If you also have £5000 in personal loans, this
then increases to £80,000 overdrawn. However, add to this
savings of £5000 and £1000 already in your current
account and your account 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 rates, credit cards and overdraft
charges.
This means you can effectively borrow as much as 99% of
your property value - 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.
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