[col type=”one-third”]
Our residential expert is Peter Rogerson, commercial director for mortgages and savings at Virgin Money
Call 0800 028 5277
or visit www.virginmoney.com
[/col]
[col type=”two-third last”]
Flexible mortgages
The flexible mortgage concept first appeared in the UK in the early 1990s. The products are designed to put you in control of repaying your mortgage – allowing overpayments to be made when you have extra cash as well as being able to reduce or even take a break from making mortgage repayments.
One of the main features of a flexible mortgage is the calculation of interest on a daily basis. Until the introduction of flexible mortgages, the majority of UK lenders charged interest annually. Applying daily interest means that any regular or lump sum overpayments are accounted for immediately, so you can reduce your mortgage term and own your home more quickly, as well as potentially saving thousands of pounds in interest payments.
[hr style=”single”]
Question
What is a flexible mortgage?
Answer
Flexible mortgage gives you more control over how you repay your mortgage debt. They usually come with a range of customer friendly features such as the ability to:
- Make overpayments
- Make underpayments
- Take payment holidays
- Borrow back overpayments
Not all mortgages offer all these features so it is worth checking with your lender to find a product that’s right for you.
[hr style=”single”]
Question
How does a flexible mortgage work?
Answer
The key to a flexible mortgage is the method used to calculate interest. Mortgage interest used to be calculated on an annual basis. Back then you could not make overpayments so this was not such a big deal.
With the advent of flexibility and the ability to overpay against your mortgage, daily interest calculation was introduced as a simple but vital innovation. Regular monthly overpayments or lump sums will be used to reduce the amount of mortgage interest you pay straightaway; saving thousands of pounds in mortgage interest. It’s a tax efficient way of making your savings work for you to reduce your outstanding mortgage balance.
If we take the example of a homeowner with a £150,000 mortgage, over 25 years, paying interest at 4 per cent. Instead of saving £100 per month into a taxable savings account, making an overpayment of £100 per month would save £17,105 in interest payments and shorten the mortgage term by four years and five months.
Overpaying on your mortgage can be a sensible option if you can afford to do so. It makes your money work in a more tax efficient way. To find the same level of return on your savings, compared to overpaying on a mortgage at 4 per cent, a basic rate taxpayer would have to find a deposit account offering 5 per cent. A higher rate taxpayer would need to find an account paying 6.67 per cent – which is unheard of at the moment with interest rates at an historical low.
[hr style=”single”]
Question
How do underpayments and payment holidays work?
Answer
An underpayment is a reduction in your usual mortgage repayment, agreed with your lender, and subject to affordability checks.
Why would you want to underpay or take a payment holiday? Well, it could be when you want to use the money you’ve already overpaid, for a specific occasion. If you don’t have a flexible mortgage, your lender wouldn’t be happy if you paid less than your usual mortgage amount.
The ability to underpay is usually only allowed if you have already overpaid to cover the amount you want to borrow, or you have sufficient equity in your property. The same applies to taking a payment holiday, although lenders will have slightly different policies.
At Virgin Money we offer the choice of taking between one to three months payment holiday. If the customer has made nine consecutive payments they are entitled to take a one month payment holiday, 18 consecutive payments would mean two months holiday and 27 consecutive payments would give the customer the option of taking three months payment holiday. The reason for taking the payment holiday will also be noted. With Virgin Money you don’t have to make any overpayments to take a payment holiday, which is not always the case with other lenders.
We always make our customers aware that while they are taking a break from making their usual mortgage repayments, interest will continue to be charged which can mean a higher recalculated monthly payment.
[hr style=”single”]
Question
Can I still access my overpayments?
Answer
Most flexible mortgages will allow you to borrow back overpayments. This can be invaluable if you are suddenly met with an unexpected expense such as a household emergency. For example, say you have overpaid £150 a month for the last year you will have overpaid by £1,800. Your lender may allow you to borrow back up to that amount and you would still be on course to repay your mortgage on time.
Flexible mortgages are great for savvy borrowers who want their money to work for them and want control over how they repay their debts.
[/col]
Leave a Reply