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FOOL'S EYE VIEW
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The financial services industry is remarkably different from the days when bank managers wore top hats and frock coats. Although the personal service enjoyed by longstanding customers has diminished with the introduction of call centres and online banking, the financial products we buy have come a long way. The big banks would argue that they created a new generation of financial products in response to consumer needs, but the reality is they were being squeezed by hi-tech competitors. Thanks to the superior technology employed by these new entrants, they were able to offer higher-value, lower-margin products than the established firms. Hence, they quickly seized a growing share of the financial services market, a trend that accelerated with the explosion in Internet access. In previous generations, if you wanted a mortgage, you approached your local building society. However, in the 1970s and 1980s, the big banks made aggressive inroads into secured lending. Nowadays, only one of the top ten mortgage lenders is a building society (Nationwide BS) and there are four banks and five ex-building societies in this table. As the dynamics of the mortgage market changed, home loans did too. Here are four steps in the evolution of mortgage lending: 1. The traditional mortgage To qualify for a home loan, you had to be a long-term customer of a lender, usually a saver. You had no option but to pay your lender's full standard variable rate; margins were high, meaning big profits for lenders. Your loan repayments were inflexible and interest was charged annually. For example, your January repayment didn't reduce your debt until the end of your lender's financial year, usually 31 December – shocking! Upper lending limits were strictly controlled (at much lower levels than today) and 100% mortgages didn't exist, so you always had to save up for a deposit. Thanks to ultra-conservative lending codes, many would-be borrowers were turned down. Thanks to inertia (a polite word for laziness), several million UK homeowners still have one of these outdated mortgages. Unsurprisingly, they're not popular among new borrowers! Over time, increased competition brought down lending margins, leading to lower interest rates for borrowers. Discounted, fixed and capped rate deals became increasingly common. Also, lending limits were raised and 100% (no-deposit) mortgages were introduced, encouraging many more Brits to become homeowners. Then the next-generation loan arrived... This is also called an Australian mortgage, since the concept was imported from the land down under. Interest is charged daily, so your repayments are knocked off your debt immediately (a few lenders credit them at the end of each month). This means you pay less interest over the life of your loan, as your lender doesn't "hold back" your repayments. You can overpay (lump sums, one-off or monthly amounts) in the good times and underpay or take repayment holidays when money's tight, usually without penalty. Generally, you aren't penalised for repaying your loan early. In fact, you're encouraged to do so! Now this is miles better than the traditional mortgage. However, things got even better with the arrival of... 3. The offset mortgage Finally we have... 4. The current account mortgage (CAM) So, what's next? As many banks are stockbrokers too (and vice versa), how about a CAM that also allows you to offset the value of your shares and investments against your mortgage? Imagine you have a £100,000 mortgage, £5,000 in your current account and a £70,000 portfolio with your bank. You'd pay interest on 100-(5+70)= £25,000 of your loan. Of course, there are risks within this product. If your shares take a dive, your mortgage debt rises by the same amount. Alternatively, a jump in the value of your portfolio would bring down your debt (and your monthly interest bill). However, the PCAM - Portfolio CAM - would be aimed at fairly sophisticated borrowers. Note that Shares CAM (SCAM) doesn't really have that ring to it! Of course, as stock markets tend to rise over time, it's likely that you'd end up paying less interest with a PCAM than with an ordinary CAM over the 25-year life of your mortgage. So, are there any lenders out there interested in developing the Portfolio CAM (copyright TMF) and stealing a huge march on your competition? Don't worry, I won't be holding my breath.... Visit the Fool's Homeowning Centre and our 21st Century Mortgage Guide.
This is similar to a flexible mortgage, but you can use your savings to reduce your mortgage interest bill. Your mortgage and savings are still kept in different pots but you pay less interest overall (and no tax on your savings).
The credit balance in your current account offsets your mortgage debt, reducing your interest bill even more. You can roll up all your savings into your current account, effectively earning interest at your mortgage rate without paying any tax. CAMs are so attractive that the Inland Revenue considered banning them!