Compensation Mortgage Calculator | It’s money

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Compensation mortgages are widely touted as a way for homeowners to pay off debts up front.

The main principle is that you pit your savings against your mortgage debt and that by forgoing earning interest on the first you are not paying it on the same amount of your mortgage debt.

On a 25-year mortgage, this can save you thousands of dollars and is very tax-efficient.

This calculator, from our mortgage partner L&C, will show you much sooner how much you could pay off your mortgage, or by how much you could reduce your monthly payments.

How they work

Most mortgage borrowers also have savings, albeit small, and it makes sense to use that money to write off mortgage debts.

Savers avoid paying tax on interest their deposits would otherwise have earned. And because compensatory mortgage lenders calculate interest daily, every pound on deposit works hard to lower the cost of borrowing.

Not to mention the fact that in a low interest rate environment, any savings you have actually earns interest at a higher rate than most traditional savings accounts.

With interest paid only on the balance between savings and mortgage debt, you get the same effect as overpaying on a home loan: but the beauty is you can get the money back if you need to.

Current accounts, savings and compensatory mortgages

Some offsets allow you to tie checking accounts and savings balances to the mortgage, while others simply use a savings pot. They can be described in different ways, but both work essentially the same.

When compensated mortgages were first created, rates were often considerably higher than those for normal home loans. This difference no longer has to exist, and offsets from some providers may actually beat normal mortgage rates.

Compensatory mortgages

In the simplest type of netting, deposits are kept in separate accounts or “pots”, but tied for the purpose of calculating interest. If you deposit more money your balance goes down, if you withdraw it it goes up.

Current account mortgages

The first compensatory mortgages launched in the UK were Current Account Mortgages (CAMs), linking a homeowner’s current account to the mortgage.

With CAMs, the bank account and mortgage have been combined so that customers see only one statement and one balance. For example, if there is £ 2,000 in the checking account and the mortgage is £ 80,000, the customer’s balance will record £ 78,000 overdraft.

The balance is calculated daily and the owner only pays interest on the balance. CAMs offer the same services as a regular bank account. Customers can also add any savings to the CAM account to reduce the debt balance. All other debts, such as personal loans or credit cards, can be transferred to the account. The owner usually pays the same interest rate on the entire lot.

The difference with refunds

With both types of compensation, borrowers usually make a regular monthly repayment, although this is not strictly necessary. For repayment mortgages, this ensures that the mortgage will be paid off at a later time, regardless of the compensation.

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

Within certain limits, netting agreements also allow homeowners to withdraw more funds at any time without having to remortgage. And lump sum overpayments can be made without penalty.

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