Mortgages That Save You A Fortune!
If you're sensible and financially disciplined, you can save a bundle with one of these hi-tech home loans.
When choosing a home loan, most borrowers don't look beyond the headline-grabbing interest rate.Alas, while choosing the lowest initial interest rate may seem like a smart idea, there are often horrors lurking in the small print, such as sky-high upfront arrangement fees, hefty redemption penalties for early settlement and so on.Hence, you need to look beyond the figures in big print to establish which mortgage best meets your needs. For example, if you're financial disciplined and a regular saver, you may be better off choosing one of the new generation of hi-tech home loans, known as offset or current account mortgages (CAMs).How they workAn offset mortgage does what it says on the tin: it offsets your savings against your mortgage debt, so you only pay interest on the difference. For example, if you have a £100,000 mortgage and £20,000 in an offset savings account, you only pay interest on the difference: £80,000. The benefit of keeping your savings in an offset account rather than a high-interest savings account is that, in effect, they earn a higher rate of interest, plus you avoid paying tax.With a current account mortgage, the concept is taken one step further, as the credit balance of your current account is also offset against your home loan. Hence, with a CAM, your savings and current account both work to reduce your net debt and, therefore, your interest bill. Cool!As well as being tax-efficient, these mortgages have many other advantages, such as:1. flexibility (you can make regular overpayments, deposit or withdraw lump sums, and take occasional payment holidays);2. by regularly overpaying even small sums, you can slash your interest bill and shorten the life of your mortgage by years; and3. you avoid the cost and hassle of switching deals every few years.However, with the first generation of offset mortgages and CAMs, the above benefits came at a price, because standard interest rates on these new-fangled accounts were higher than the lowest discounted, fixed and tracker rates. However, rates for these loans have come down, making them a much more attractive proposition.Indeed, according to independent financial researcher Defaqto, the average annual interest rate for an offset tracker mortgage (one which moves with the Bank of England's base rate) is now 5.24%, compared to 5.42% for traditional tracker mortgages. Despite this, offset and current account mortgages account for only a tenth (10%) of new mortgage lending, although this proportion is expected to increase over time.Who would benefit most from these modern mortgages?As Defaqto explains, while there are significant long-term benefits to choosing a CAM or offset mortgage, borrowers need to be extremely financially disciplined in order to make these home loans worthwhile.Defaqto warns that CAMs and offset mortgages are best suited to higher-rate taxpayers who have above-average savings and are prepared to use a modern mortgage as part of their overall financial planning. In other words, if you're a basic-rate taxpayer with a small savings pot and lax financial habits, then CAMs and offset mortgages probably aren't for you. So, as always, it's horses for courses, and your own financial habits will determine whether a CAM or offset mortgage is right up your street!More: Want to find the perfect home loan? Visit our mortgage centre today!