Loans with novelty value

As the mortgage price war continues to rage, banks and building societies are increasingly turning to quirky deals and novel added extras in an attempt to make themselves stand out from the crowd.

The Woolwich this week unveiled an intriguing new mortgage which enables parents to use their savings to help reduce their offspring's monthly home loan payments without actually handing any money over to them.

Legal & General has launched a flexible mortgage designed to help homeowners cover the costs of educating their children.

And mortgage broker Charcol has brought out a novel deal which offers borrowers double the benefit if interest rates fall - so if the Bank of England base rate falls by 0.25%, your mortgage rate is cut by 0.5%.

Offbeat offers such as these reflect the fact that mortgage lenders are being forced to find new ways of attracting borrowers' attention.

"In the current market, innovation is critical," says Siobhan Hotten at Charcol. "There is so little differential price-wise between one product and another, so lenders are going to have to get a little bit clever."

The Woolwich deal is called open plan offset together. It offers a way for families to help reduce their children's mortgage bills or cut years off the loan, by offsetting their savings against their youngster's borrowings.

How it works is that the son or daughter takes out an open plan offset mortgage with the Woolwich, where the rate they pay is set at 0.75% above the Bank of England base rate for life (currently 6.25%). This deal allows people to offset savings against debts, and you can borrow up to 95% of the value of your home.

Then the parent opens a Woolwich open plan account for savers, which they can link to the mortgage. The value of the money in this account is then offset against the mortgage, saving interest on the home loan.

However, the parent's (or grandparent's) money is kept completely separate and they control the account, enabling them to add or withdraw money at any time. They simply make a phone call to link their account.

The mortgage holder saves money by only paying interest on the difference between the amount borrowed and the amount in the linked savings account. For example, someone with a £70,000 mortgage whose parents or grandparents offset £10,000 of savings will only pay mortgage interest on £60,000 all the time that the savings are in the account, which would save the borrower £52 a month.

Existing offset mortgage customers can also benefit from this new option. And offset together isn't restricted to family members. "Anyone can offset funds against someone's offset mortgage, for example siblings or partners," says a spokeswoman.

"Also, the offsetting doesn't have to be a long-term arrangement - it can be changed at any time. Parents in receipt of a windfall or pay bonus could offset it against the mortgage until they have decided what to do with it," she adds.

It means parents can help ease the financial strain that many young people go through when setting up their first home without actually having to give their money to them.

Many parents already give children a helping hand with their mortgage. A survey has shown that 27% of first-time buyers were given their deposit by a family member.

Also this week, Legal & General launched the "in-tuition mortgage", a flexible package designed to enable parents to plan for a range of costs associated with schooling such as nursery fees, private education and university costs. It also enables parents with children already at fee-paying schools to release funds to pay the ongoing fees.

The deal is based around L&G's flexible reserve mortgage and allows people to borrow up to an agreed limit over and above the amount needed for the mortgage on their home. It also allows parents to make overpayments and then draw down on the reserve they've built up to pay for educational costs when they arise.

There are two varieties of the loan, one with a variable rate of 6.35% and the other with a rate of 6.45%, though in both cases there is a 0.5% discount for the first two years. These rates apply from May 1. "Mortgages are not just about buying a home these days. You can use it to manage your lifestyle," says a L&G spokesman.

Meanwhile the new Charcol deal is the result of a link with Newcastle building society and is capped at 5.99% for three years - that means you will not pay more than this until July 1 2004.

The loan is pegged to the bank base rate, and what's different about this deal is that you will get double any base rate cut - so if the base rate falls by 0.5%, the mortgage rate is cut by 1%. The downside is that if interest rates then rise, payments will also rise by double the increase. But with the 5.99% cap in place, you can be secure in the knowledge that you won't pay any more than this.

At the end of the three-year period the rate reverts to Newcastle's standard mortgage rate, but there are only early redemption penalties within the three years so you can walk away at that point. You need to be able to pay a deposit of at least 10%, and there is a £350 arrangement fee and a £49 booking fee.

In other mortgage news, Britannia building society is cutting its standard mortgage rate for new and existing borrowers , which will fall from 7.39% to 7.14% from May 1 following the recent base rate cut.

But from July 1, loyal borrowers who have had their current mortgage for 10 years or more will pay a standard variable rate of 6.59%, with borrowers for more than five years paying 6.79%. The standard rate for borrowers who have been with the society less than five years will fall to 6.99%.