Some mortgages come with special features which could help your cash flow or pay off your mortgage quicker. Read this guide to learn more about cashback, current account and offset mortgages.

A MORTGAGE IS A LOAN SECURED AGAINST YOUR HOME. YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE

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Cashback mortgages

With a cashback mortgage, you’re given some cash when you take out your mortgage. The cashback sum may be a proportion of the amount you’re borrowing (for example 1%) or may be a fixed amount (for example £500). You receive the cashback on completion, not before.

Advantages

• Having a lump sum to help with, for example, the costs of furniture and repairs to a new home

Disadvantages

• Cashback mortgages often charge a higher interest rate than other mortgages. To check the true cost of cashback, compare your mortgage costs with other products in the market.

Offset mortgages

With an offset mortgage, your savings are linked to your mortgage. This means that your savings go towards reducing your mortgage, so you only pay interest on the mortgage amount, minus the amount you have saved. It’s a good choice for people with savings and a reasonable bank balance every month. Offset mortgages can be on fixed or variable rates.

For example, you have a £200,000 offset mortgage at 3% interest. You also have £10,000 savings in an offset account.

The £10,000 is subtracted from the £200,000, so you only pay interest on the balance of £190,000. So rather than earning interest separately on the £10,000 as savings, you would instead avoid paying 3% interest on £10,000 of your debt.

Advantages

• You still repay your mortgage every month as usual, and pay it off quicker because you reduce the amount owed
• You can still make withdrawals on your savings when you wish

Disadvantages

• Not ideal for those relying on their savings interest to boost their income
• Offset mortgages don’t typically offer you access to discounted rate deals

Current account mortgages

Current account mortgages are a type of offset mortgage. The only difference is that your current account and mortgage are merged into one. So if you have a mortgage of £150,000 and £1,500 in your current account, your statement will show that you owe your lender £148,500.

A current account mortgage example

Current account mortgages are similar to an offset mortgage. The difference is that your current account, rather than your savings, and mortgage are merged into one. For example, if you have a current account mortgage of £150,000 and £1,500 in your current account, your statement will show that you owe your lender £148,500.

For example, imagine you are earning £3,000 a month after tax, and have a mortgage of £148,000.

While your £3,000 is in the account, you will only be charged interest on £145,000.

As you go through the month and spend some of your pay, your mortgage balance gradually rises and the daily interest charges increase.

When you get your next pay packet into your bank account, your mortgage balance will once again be slightly reduced and the interest being charged will fall.

So with a current account mortgage, the interest charged fluctuates in line with the rise and fall of the amount in your current account. If you have a repayment mortgage you will pay off more capital whenever your current account is in credit.

Advantages

• You have the flexibility of using money in your current account to reduce your monthly payments
• You’re more likely to be paying off your mortgage quicker than with a standard type of mortgage

Disadvantages

• These types of mortgages don’t typically offer you access to discounted rate deals.

Other mortgages with flexible features

Some conventional mortgages offer flexible features, listed below:

The option to overpay

Many mortgages allow you to pay more than your normal monthly payment and thus reduce your debt quicker. Check if there’s a limit on how much you can overpay each year – it’s often 10% of the mortgage. Paying back your mortgage before the end of its term may seem like a great idea, but you need to be aware that you may incur an early repayment charge, so it’s wise to check the terms of your mortgage agreement.

The option to underpay

Depending on your financial circumstances, some lenders will allow you to pay less than your normal monthly repayment. This can be useful when money is tight, but it does increase your debt as the difference is added to your mortgage. It will take you longer to pay off your outstanding mortgage and you’ll pay more interest over the course of the loan.

The option to take payment holidays

With some mortgages – and depending on your financial circumstances – you may be allowed to take a payment holiday. This means you don’t have to make any payments for a limited period. Not all mortgages have this option.

This guide was provided by Money Advice Service – more information can be found here