Until recently, if you wanted a flexible mortgage you had to forego the special discount, fixed or tracker deals offered by lenders. But this has changed in the last couple of years and it is now possible to get a good rate AND flexible repayment facilities.
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So what is a flexible mortgage?
There is no official definition which means lenders can use this label how they like. So one lenders flexible mortgage may be less flexible than a rival lenders standard mortgage.
A basic flexible mortgage should offer the following
features:
- Overpayment facilities
Allows you to make regular or one-off repayments.
Regular overpayments can have a significant effect on the overall cost of your mortgage. For example, if you had a £90,000 mortgage arranged over 25 years with interest charged at 5% a year, by paying an extra £50 a month you would pay off the loan in 21 years and 2 months saving £12,022 in interest payments.
Lump-sum repayments should also be allowed, but check – there may be a limit on the amount you can overpay or restrictions on when lump-sum repayments can be made.
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- Regular underpayment facilities
Allows you to make reduced monthly payments for a period. This can be useful if your income drops, such as when you start a family. Often you have to build up a reserve of overpayments before you can make underpayments.
- Payment holidays
Allows you to stop payments altogether for a set period. You may want to take a break while you travel the world or are out of work. The length of the payment holiday may be limited as may the frequency with which you can take them.
- Access to overpayments
If you have overpaid in the past you should be able to borrow back this money if you need it. Check for any restrictions.
Offset mortgages
These carry the flexible mortgage theme one stage further by also allowing you to offset your savings against your mortgage debt. For example, if you had a £100,000 mortgage and £12,000 in savings, by offsetting your savings against your mortgage debt you would only have to pay interest on £88,000. Of course, you forego any interest you might otherwise have earned on your savings, but as mortgage rates are nearly always higher than savings rates you are unlikely to lose out. And by keeping your savings in a separate account rather than using the money to reduce your mortgage, you always have easy access to this cash and do not have to ask your lender if you can borrow the money back.
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Interest is usually calculated daily, although there are exceptions, which means that any savings in your offset account start to immediately reduce your overall mortgage costs.
Increasingly, lenders are offering the offset feature on discount, tracker and fixed rate products, points out Robert Clifford of mortgage broker Mortgageforce.
Some lenders offer offset as a feature while others still regard it as a standalone product and price it as such. The rates charged on offsets have come down in the last couple of years but there is still often a premium to be paid. You have to decide if you are happy and it is worthwhile to pay the premium, he says.
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This premium is most obvious on fixed-rate deals but less so on two year trackers and not at all on lifetime trackers, says Ray Boulger, senior technical manager at independent mortgage brokers John Charcol.
Lenders such as Intelligent Finance have driven down rates. Its two year tracker is set at 0.26 per cent below Base rate. The arrangement fee is £1,495 making this good value for those wanting a mortgage of £200,000 or more, says Boulger.
Of course, for offsetting to be worthwhile you need to have some savings – at least £10,000 suggests Clifford – or a volatile income. People who receive large bonuses or receive large fees on an irregular basis such as barristers, or the self-employed who keep their tax money in a savings account, can put this money to good use by offsetting it against their mortgage.
Some lenders also offer a loan facility on their offset mortgages. For example, Standard Life Bank offers a cash reserve facility. This is the difference between the amount it will lend you when you first apply for your mortgage and the amount you actually borrow. The total amount you can borrow including the cash reserve is up to 90 per cent of the value of your home.
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For example, if you bought a house for £100,000 and wanted to borrow £75,000, your cash reserve might be set at £15,000, bringing the total amount available to you to borrow to £90,000. You do not have to use the cash reserve at the outset but you have access to it at any time in the future should you want it, says Andrew Boddie, head of marketing at Standard Life.
We see a lot of customers using the equity in their home to buy or help fund a second property either in the UK or Spain. Weve also had people use the cash reserve to buy narrow boats and even Icelandic horses. Customers have started to realise how they can use their property as an asset, he says.
As well as loan facilities, some lenders also offer a credit card and/or a current account which can be linked to their mortgage. Any outstanding loan or credit card debt is treated and charged at the same rate as your mortgage. While any credit in your current account can be offset against your mortgage debt bringing down the balance on which you have to pay interest.
Lenders such as Woolwich, Clydesdale and Intelligent Finance all let you link your current account to your offset mortgage so you can benefit from having your salary paid into your account. To make the most of this its a good idea to pay all your direct debits at the end of the month, says Boulger.
Current account mortgages (CAMs)
CAMs work in a similar way to offsets, but instead of having several accounts linked, all your savings and debt operate through your current account. Usually you have to have your salary paid into your account and at the end of the month, any unspent income is automatically taken off your mortgage debt. As your savings are in with your mortgage, these effectively reduce the amount of interest you have to pay.
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The only CAM being actively marketed right now is The One Account, originally launched by Virgin and now owned by The Royal Bank of Scotland.
Lenders have launched offset mortgages rather than CAMs for several reasons, points out Clifford. It can often seem complicated having all your finances together, people also can be put off by receiving a huge overdraft balance each month. But for those who like this style of managing their mortgage it works very well. Customers tend to need face-to-face advice to fully understand how they can make the most of CAMs, he says.
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