Flexible
In the past, people took a mortgage with a lender and loyally paid it back every month over 25 years.
But as lifestyles and work patterns become less predictable, borrowers increasingly need mortgages that bend to them rather than dictate to them. More people are self-employed, take career breaks or return to study.
What is a flexible mortgage?
You can expect a flexible mortgage to let you do some or all of the following:
- Increase your monthly payments
- Pay off lump sums
- Reduce your monthly payments
- Take a payment holiday
- Borrow back your overpayments or let you borrow more up to set limit (reserve facility)
- Choose to pay weekly or fortnightly
- Calculate interest on a daily or monthly basis
Overpayments
When savings rates are low, it makes sense to use your spare cash to pay off your mortgage (although it's wise to keep a few thousand pounds in a savings account for emergencies).
You can overpay your mortgage in two ways. You can either pay a little extra each month or you can pay off the occasional lump sum, sometimes known as capital repayments. Most flexible mortgages don't have any restrictions on when and how much you can overpay. But if the mortgage comes with early repayment charges in the first years, check to make sure that you can still overpay without being penalised.
You can make overpayments to build up 'credit' for a planned future event - such as a career break to have children or a return to education - when you may benefit from underpaying for a short while.
Either method of overpaying can save you thousands of pounds of interest and help you repay your mortgage early.
Underpayments
Most flexible mortgages give you the option to reduce your monthly repayment or simply not pay at all (a 'payment holiday'). This can be a useful feature for months when you have extra expenditure (for example, Christmas) or if you could benefit from a break from payments for a short while (for example, if you start a family).
If you choose a mortgage with an underpayment option, you need to be disciplined - especially if you choose one that doesn't require you to make overpayments first.
Reserve Facility
Some flexible mortgages give you the option to borrow extra in one of two ways - either by borrowing back any overpayments you've made, or by increasing the size of the mortgage, up to a set limit.
The advantage over a traditional mortgage is that you don't have to go through the formalities of applying for an additional loan. Many will transfer the money into your bank account within a few days. Some give you a chequebook or cashcard so that you can draw down the money yourself when you need it.
Remember that, while the interest rate you pay to borrow on your mortgage is usually lower than other types of loans, you'll be paying interest on the amount you borrow over the rest of the term (unless you make subsequent overpayments). So, although your monthly repayments may be cheaper than with, say, a personal loan, the total amount of interest you pay may be greater.
Daily interest
Traditionally mortgage lenders calculated the interest charged on mortgages annually. This meant that, if you did pay off extra, you still paid interest on that money until the end of the year. But with the introduction of flexible mortgages lenders started to calculate interest on a daily or monthly basis - a fairer method as you pay interest only on the money you owe. In fact many now use a daily or monthly interest calculation on their standard mortgages too.
Fortnightly or weekly repayments
A few flexible mortgages give you the option to repay fortnightly or weekly. This can be a useful feature if you are paid on this basis. In addition it means you repay slightly more each year than if you repay monthly, helping you to repay your mortgage earlier.
Your home may be repossessed if you do not keep up repayments on your mortgage.
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The Financial Services Authority does not regulate some forms of Mortgage.
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