What are Flexible & Offset mortgages?

Whether you would like to pay off your mortgage early or reduce your outgoings on a monthly basis, this could be achieved with a flexible or offset mortgage. These mortgages are widely advertised as a way for homeowners to maximize their money.

Offsetting savings or current account deposits against mortgage debt in a single rolled-up account began in Australia decades ago. The concept took off here in the late Nineties.

The principle is simple: most mortgage borrowers also have savings, even if they are small. Using this money to cancel out mortgage debt makes sense. Savers avoid paying tax on interest that their deposits would otherwise have earned and because offset mortgage lenders calculate interest daily every pound on deposit works hard to reduce the cost of borrowing.

In a low interest rate environment, any savings you have are effectively earning interest at a higher rate than most mainstream savings accounts will pay.

There are three basic types of Flexible/ Offset deal:

Current account mortgages

The first offset mortgages launched in the UK were current account mortgages (CAMs), linking a homeowner's current account with the mortgage. Britannic Money's CAM was first, launched in 1997, followed closely by Virgin One, now called The One Account run by Royal Bank of Scotland.

With CAMs, the bank account and mortgage were combined so customers view just one statement and see one balance. For example, if there is £2,000 in the current account and the mortgage is £80,000, the customer's balance will register £78,000 overdrawn. The balance is calculated daily and the homeowner pays interest only on the balance. CAMs offer the same services as an ordinary bank account. Customers can also add any savings into the CAM account to reduce the debt balance. Any other debts, such as personal loans or credit cards can be transferred to the account. The homeowner, typically, pays the same interest rate across the lot.

Offset mortgages

The second type of offset is where the deposits are kept in separate accounts or 'pots' but are linked for the purpose of interest calculation. Providers include Barclays and Woolwich, Intelligent Finance (IF), Egg, First Direct, Newcastle building society, Northern Rock, Standard Life and Yorkshire building society.

With these, as with CAMs, borrowers pay interest only on the mortgage, minus savings.

Flexible mortgages

A flexible mortgage is different to an offset product. A flexible mortgage is designed to give you more control over your finances, with varying degrees of flexibility - you should be able to overpay, borrow back overpayments, underpay and take payment holidays when you make a payment, plus as soon as you make a mortgage payment you start paying interest on a smaller loan amount.

Flexible mortgages are specially designed to accommodate the changes taking place in our working environment and lifestyles. Some flexible mortgages allow you to take payment 'holidays' where you can choose not to make monthly payments for up to six months. This is particularly useful for couples starting a family or for people taking time out to study.

However you will have to agree payment holidays with your lender as taking time off could either increase your repayments later on or prolong your loan period.

With a fully flexible mortgage you can vary the payments to suit your circumstances. If you’ve got extra cash, use it to pay off more of your mortgage. Keep up the overpayments and you could pay off your mortgage years early and that could save you money!

Do you want a payment holiday? With a flexible mortgage you can use the overpayments you have built up to cut back or stop your payments for a while. You could even borrow back money.

Is a flexible or offset mortgage right for me?

With all mortgage products borrowers usually make a regular monthly repayment, though this may not be strictly necessary. Repayment mortgages guarantee that the mortgage will be repaid at some future point, regardless of offset.

Any savings above that are offset against the loan and reduce the interest charged on the mortgage. This means that the borrower is effectively overpaying on monthly repayments and reducing the overall term of the mortgage.

Within limits, offset deals also allow homeowners to draw more funds at any time without having to remortgage and lump-sum overpayments may be made without penalty.

Interest rates on offset mortgages will very rarely be the best on the market. You could get a cheaper special deal on a traditional mortgage if you are willing to shop around and switch lender every couple of years. Offsetting, therefore, is only worthwhile if you have a reasonable amount of money sloshing around in your savings or current account.

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