Flexible mortgages, as you might imagine, offer borrowers more choice than most. The idea is that they give you more freedom over how you make your mortgage payments, the amount you pay and when you pay it.
Some flexible products come with lots of bells and whistles that you may never actually use. And truly flexible mortgages usually cost more than a standard home loan, so there is a danger that you could end up paying over the odds for something you dont need.
But you can also save yourself plenty of interest if you overpay on your loan. Or you could take six months off your mortgage and use the money you save to travel or for a new endeavour.
The features
There are three main features that people look for in a flexible mortgage:
Overpayments, the option to pay more into your mortgage, either by increasing your monthly payments or by paying in larger lump sums
Underpayments or payment holidays, which, as the names suggest, allow you to make smaller monthly payments or actually stop paying your mortgage for a short period of time
Cash withdrawals or further advances, both features that enable you to take money out of your mortgage, either from the amount that you have already overpaid (drawdown), or as an additional loan amount that has been agreed up front (further advance).
Its important to know which of the above features you are likely to need before looking for a flexible mortgage, because many standard home loans already offer some degree of flexibility these days, often at no extra cost to the borrower.
How it works
The most popular flexible feature for homeowners in the UK is overpayment. By just paying an extra, say,£ 50 a month into your mortgage, you could shave years off the length of your loan and save thousands of pounds into the bargain.
But before you get rid of your old mortgage and plump for a shiny new flexible one, its worth checking to see if you current home loan will let you make overpayments. Paul Fincham at Halifax explains: All our mortgages have flexible features and allow either overpayments or lump-sum payments. This is the most popular flexible option and financial advisers will tell you to try and pay off your mortgage as quickly as possible.
Another popular flexible feature is the option to make underpayments by reducing your monthly mortgage payment, or taking payment holidays. With most flexible mortgages, however, you can only underpay or stop paying up to the total amount of money you have previously overpaid. So, if you have overpaid by £6,000 and your monthly payment is £1,000, you can usually only take a six-month payment holiday.
James Cotton, of Mortgage Broker London & Country, believes that underpayment and payment holiday features should be used wisely, and not seen as a way of avoiding your mortgage commitments. He says: For some people a truly flexible mortgage can be useful, such as the self-employed or seasonal workers, as their income may fluctuate, so the option to underpay or take payment holidays is helpful.
Abbeys Flexible Plus is a good example of a true flexible mortgage. Not only does it allow overpayment and underpayment, but you can also put your overpaid cash into a savings pot. Instead of earning interest on those savings, you can choose to pay less mortgage interest, which is a loan called an offset mortgage.
Yorkshire Bank says that many of its customers are using offset mortgages to help reduce the length and overall cost of their home loans. By using an offset mortgage, the bank says that a borrower with a £187,000 loan, who maintains a current account balance of £1,000 and an average savings account balance of £500, could slash five years from their mortgage and save £78,000 compared to a standard 25-year deal.
Peter Brown of Yorkshire Bank says: People are increasingly becoming more savvy to the benefits of flexible mortgages. They will pay a premium for a flexible product, but even then, the gap between the cost of a flexible mortgage and a standard mortgage is coming down.
Borrow back a little
Some flexible mortgages also allow you to borrow an additional sum in the future, perhaps to pay for home improvements or building work. With Abbeys Flexible Plus, the interest rate you pay for this further advance is the same as the rate for the rest of the mortgage. But this is not always the case.
James Cotton warns that extra borrowing with some flexible mortgages might cost you more than you realise: If you can borrow more, its important that you can borrow at the same mortgage rate, not the lenders standard variable rate, which might be higher. The popularity of flexible products such as offset mortgages is increasing, but there is still a premium to pay for those features. Its important to get advice before getting a flexible mortgage, and it is worthwhile reviewing it as you go along, because your circumstances may change and you might not need the extra features youre paying for.
CASE STUDY
Finance worker David Rees, 41, from Newbury in Berkshire, reckons he has shortened his mortgage by almost three years since taking out a Flexible Plus with Abbey.
He can decide how much he pays every month by changing his payment details via a special website and when he increases his payments, the website actually gives a forecast of how much shorter his mortgage will be if he keeps on overpaying at that rate.
Yet David says that it was the interest rate that convinced him to go with Abbey. He took out a £106,000 ten-year tracker mortgage, which tracks the Bank of England base rate, with a 0.75 per cent discount, fixed for the first nine months. David explains: I wanted to pay off my mortgage as soon as possible, but with my previous mortgage I couldnt make overpayments or lump-sum payments. I looked around for a new mortgage and Abbey offered the best terms and rates.
An overpayment facility is ideal if you regularly have money left over at the end of each month, or earn an annual bonus that can be salted away in your mortgage. David says: I have spare cash every month, so I put that into my mortgage. If my circumstances change and I have less money or more money left over, I can just change my payments over the internet. Using the website I can actually see where I stand with my mortgage and know how much I still owe.
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