We’re flexible when it comes to working hours, we’re flexible when it comes to childcare, we’re flexible when it comes to other area of our finances. So why not be flexible with our mortgages?
A few years ago, a new generation of flexible mortgages were launched. They were said to be the way of the future, and all borrowers were going to take them out.
Well, that has happened, but perhaps not in the way that lenders planned. Nowadays, most mortgages aren’t described as flexible loans, they are described as fixed rates, or trackers and so on. But many of them come with flexible features.
For several years, flexibility has been a buzzword in the mortgage market. Lenders flaunt flexibiliy as a must-have for every borrower, but what counts as flexible differs widely. Compared with a few years ago, most mortgages are flexible – interest is usually calculated daily and you can often overpay by a certain amount each year.
But this is more down to the increasing flexibility of the lenders, and the technology they have. Daily interest calculation is done by computer, it doesn’t need someone to sit there doing their sums for each mortgage like how it used to happen. Likewise, lenders expect you to switch deals every time an existing special period comes to an end and as such they tend not to tie you in for excessive amounts of time.
Core features
Full flexibility offers six core features: daily interest calculation, overpayment and underpayment facilities, payment holidays, the ability to draw down an additional sum and no tie-in period so you don’t suffer a penalty if you decide to get out early.
Daily interest calculation means any payment you put in immediately goes into reducing the outstanding balance of the loan. Before the arrival of flexible loans, lenders routinely calculated interest annually, so it wasn’t worth overpaying because the outstanding balance would stay the same until the annual recalculation. With daily calculation though, every payment has an immediate effect, which means the total amount of interest you have to pay over the term of the loan reduces, and the loan is paid off more quickly.
When you are looking at flexible features, it’s worth investigating how the lender will treat any overpayments. Do they regard it as your money, which you have a right to borrow back if you want to, or will you have to go through various hoops to get it? Likewise, how much can you repay at any time? Many lenders set a maximum of 10 per cent of the outstanding balance per year. For most people this is more than enough, but if you’re expecting a large cash inflow, you may need more.
If you lose your job, or suffer a period of ill health, an underpayment facility can help you weather a sticky patch. Usually there are limits to this, so you may have to build up a regular payment record first. Intelligent Finance, for example, will let all borrowers – provided they have maintained payments – take up to two payment holidays for every year they hold the mortgage. Some lenders will allow you to use any overpayments you have used to make your monthly repayments until they run out.
A drawdown facility gives you access to a lump sum at the same or similar mortgage rate. This is ideal for home improvements or other big purchases, and the costs of borrowing money at mortgage rates is usually considerably cheaper than using other methods. When you take out your mortgage, your lender will normally tell you how much you have available to you, which will be dependent on your income, your other debts and the value of your home. If any of these change, so will the amount available – if you’ve had your mortgage with this facility for a few years, the value of your home means you’re likely to be able to borrow more than you were originally offered.
Finally, there’s a no tie-in period and the type of mortgage you get will depend on whether this is offered. Generally, even with flexible mortgages, if you take an initial special rate – a fixed or discount rate for example – you’ll be tied in for the duration of that deal. It’s up to you what to take, but you’ll probably end up paying less in repayments by taking one of these deals. And although it’s not
Working for you
These facilities may be increasingly valuable in the current climate. The credit crunch means most people are a little worse off than before, By overpaying now, you can take a break later, if required. And now it’s more expensive to borrow money, you could draw down on your mortgage at a lower cost than most other loans if you needed to fund a large expense.
“A flexible mortgage puts the borrower in control of when and how they pay their loan,” says one broker. “In the olden days, borrowers were more tied in to lenders in when and what they paid. The borrower is now in control.”
By far the most popular feature of a flexible mortgage is overpayment. If you want to be free of your home loan as soon as possible it’s ideal. Most lenders will let you make lump sum overpayments, but others will let you add just a few pounds a month extra as well. The amounts you can save here are amazing – a £50 a month overpayment on a £100,000 mortgage will pay off your home loan years early and save you around £5,000 in interest.
And you shouldn’t have to pay more for your loan if you want flexible features. Some of the best deals on the market have flexible features now. They may be a little restrictive on lump sum overpayments for the first couple of years, but they’ll do all you need.”
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Case study
Sales manager John Adams and his partner Kate Smith, a hairdresser, are using the flexibility of their mortgage with first direct to pay off their mortgage as quickly as possible.
“My salary is made up of a base income, then I get a monthly commission and the possibility of a large bonus at the end of the year,” explains John. “So when we applied for the mortgage, the bank only took account of my and Kate’s basic salaries and we have set our repayments based on that.
“My monthly commission isn’t guaranteed, and I use it for different things. We try and put a bit aside each month for a holiday, then a bit for other bits and pieces and then if there’s anything left over, I’ll pay off a bit extra on the mortgage.
“And I also have the possibility of getting a larger annual bonus if both I and my company hit all our targets – I don’t get it every year, but when I do I pay more off the mortgage.”
John and Kate took out their loan in 2008 with an expected date of paying off the mortgage of 2033. “At the moment, our predicted final date is already three years earlier than expected, and if I keep on making additional payments, it will come down even sooner,” explains John.
“The other advantage is that because I am allowed to take back my overpayments, we have a cushion for anything that comes up. So if we start to think about having children, we can use some of the money we have overpaid to cover the costs of that.”
