MONEY COMMENT
Truly Funky Mortgages

By Cliff D'Arcy
October 8, 2003

One of the key messages we try to get across to our readers is the importance of managing debts. We'd all be miles better off if we could steer clear of expensive debts, such as overdrafts, credit cards, store credit, personal loans and so on.

What's more, we'd get another big boost to our finances if we made our mortgages work harder for us. There are over 11.5 million mortgages in the UK, but millions of borrowers are paying their lenders' standard variable rates. This is bad news, because these bog-standard rates are around 2% a year higher than good special-rate deals. We estimate that re-mortgaging (finding cheaper home loans) could save us up to ten billion pounds a year between us!

If you've decided to shop around for a better mortgage, make sure you take a look at these modern home loans:

Flexible mortgages

• Usually, the interest you pay is calculated daily (sometimes monthly), so all your repayments are knocked off your debt immediately.
• This means that the interest bill over the life of your home loan is lower, because your lender doesn't 'hold back' your repayments, as they do with many dusty old loans.
• You can put in extra lump sums, one-off or monthly amounts to overpay in the good times, plus underpay or take repayment holidays when money's tight, normally without penalty.
• Generally, you aren't penalised for repaying your loan early - in fact, you're encouraged to do so!

Offset mortgages

These are similar to flexible mortgages, the key difference being you use your savings to reduce your mortgage interest bill. In most cases, your mortgage and savings are kept in different 'pots'. In addition, most offset mortgages allow you to overpay, underpay and take repayment holidays.

For example, if you have a mortgage of £80,000 and offset savings of £20,000, you only pay interest on £60,000 - this is your 'net debt'. Effectively, this means that you 'earn' tax-free interest on your savings at your mortgage rate, which beats taxed savings account hands down!

Current account mortgages (CAMs)

These are similar to offset mortgages, but the credit balance of your current account also offsets your mortgage debt, which reduces your interest bill even further. You could choose to throw all your savings into your current account, instead of having separate pots, because it all goes towards reducing your mortgage interest bill.

Furthermore, you can roll up other expensive loans and credit card debts into a CAM, which dramatically reduces the cost of these debts. Here's an example of how a CAM can save you thousands of pounds with hardly any effort required. Say you have:

• A £100k interest-only mortgage, paying a standard variable rate of 5.5% (5.8% APR)
• A £10k personal loan, paying 11.2% APR
• £6k on your credit card, paying 17.9% APR
• £20k in your savings account, earning 2.95% AER
• £1k in your bank account, earning 2% AER (most big banks pay a measly 0.1% AER!)

By switching to an offset mortgage charging 4.5% a year (4.6% APR), you benefit to the tune of:

Mortgage:      £1,000 a year
Personal loan:   £339 a year
Credit card:     £772 a year
Savings:         £320 a year
Bank account:     £25 a year
TOTAL:         £2,456

So, you're almost £2,500 - or over £200 a month - better off! Also, effectively, you only have to keep an eye on one account instead of five, which means less hassle all round.

Without a doubt, CAMs are by far the coolest loans around - they make traditional mortgages look positively ancient! Visit our Offset Mortgages Centre today to find out whether a CAM is ideal for you.

Many thanks to First Direct for supplying these figures.

More: You Decide Which Mortgage Is Best | Good, Bad And Ugly Mortgages.