Offset mortgages with "expense account"?

TParkin_2

New to this board, so please bear with me if this has previously been addressed.

Recently a broker tried to sell me a CAM mortgage with an expense account. I understand the benefits of taking out such a mortgage with respect to paying off the mortgage earlier etc. However they also made available a 0% expense account. This would work as follows:

My salary etc would go into reducing my mortgage every month as with other CAMs, but all my expenditure would come from a 55 day 0% expense account which would automatically be paid off on the 55th day by my CAM therefore increasing my mortgage debt again. This would continue over and over again until the debt was paid off (end of mortgage).

The interest rate offered wasn't great 5.7% (variable) and i have found better rates since, however no mention of the "expense account" option.

Can anyone tell me whether the expense account option is likely to be better than the lower interest rate CAMs i have found?

Ta ???

DiggingOut

Basically, if I understand correctly this increases the amount you have available to offset your mortgage by allowing you to borrow for your monthly expenses at 0%.

You can do the same without the higher interest rate for a lot of your expenses by using a credit card and paying it off in full each month. You will have no interest, and the money will stay in your current account until the monthly payment is made, thus offsetting your mortgage for that much longer.

Check the thread near the top of the board on "offset mortgages -- the numbers" to determine whether an offset is really beneficial for you or not.

TParkin_2

Thanks alot.

I guess the difference between credit card and "expense account" is the no. of days interest free.

Am i correct in thinking that the major benefit from CAM mortgages comes from the offsetting large sums of savings? - which i dont have!!

Would i simply be better off over paying whenever possible on my current mortgage (3.9%)?

DiggingOut

If you don't have lots of savings, overpayments are almost always better. BUT!

Did you say 3.9%? You may not be able to afford to make overpayments on that! Oh, you may have the money to do so, but....

First, have you used your cash ISA allowance this year? If not, you can put £3K in an Abbey Postal ISA and earn 5.1% tax free (likely going up soon). So that £3K can either save you 3.9% on your mortgage interest or earn you 5.1% tax free. If married, your spouse also has an ISA allowance. So on a mortgage that has a lower rate than the going rate for cash mini-ISAs, you should never overpay until you have used your ISA allowance (and your spouses, if married).

Second, cahoot is paying 5.5% on savings. Now if you are a higher rate taxpayer, that nets to 3.3%, lower than your mortgage, so an overpayment on the mortgage is better than savings in cahoot if you are a higher rate taxpayer (although it is good to have SOME reserve in savings for emergencies, of course).

But if you are a basic rate taxpayer, the net is 4.4% -- higher than your mortgage, so it is better to save in that case.

If you are married, you can put the savings in your spouse's name as well. If your spouse is not a tax payer, the net is 5.5%. So if your spouse doesn't pay tax or either you or your spouse is a basic rate tax payer, cahoot savings is currently better than overpayments on a mortgage at 3.9%.

This is especially true if there are any penalties for overpayments.

TParkin_2

Thanks for the advice.

Has anyone ever heard of this type of mortgage with such an "expense account"?