Flexible mortgages allow you to over and underpay, and take payment holidays
Flexible mortgages radically changed the face of the UK homeloan market when they were first introduced in the mid-1990s. They enable you to take more control over your finances thanks to a number of features that set them apart from more conventional mortgages.
The standard features of a flexible mortgage are:
Overpayments: You can make regular or occasional extra payments without incurring early repayment charges (ERCs). This enables you to pay off your loan more quickly, which means you pay less interest. Equally, should you gain an unexpected windfall; no charge will be levied if you decide to pay the mortgage off in full.
Underpayments: You can make reduced payments for one or more months during a period of reduced income or extra expenditure. Most lenders require you to have built up a sufficient overpayment reserve although some allow you to overpay from the start. You need to get permission beforehand.
Interest calculated daily: Every overpayment has an instant effect on the total amount you owe as interest is calculated daily rather than annually. This means that the balance is instantly reduced and no further interest is charged. Equally, underpayments are reflected straightaway in the balance.
Payment holidays: You can take a break from paying the mortgage for one or more months. Some lenders limit the frequency of underpayments or holidays, some only permit them after six, 12 or 24 months and others do not permit them in certain circumstances, such as redundancy.
Drawdown facility: You can withdraw money up to a pre-agreed borrowing limit, or equal to the sum of overpayments made previously. Since interest is charged at the same rate as the mortgage, this is a cheaper way of borrowing money than through personal loans or credit cards.
Control your finances
Flexible mortgages give you control over your finances. You can reduce the term of your mortgage by several years if you make regular overpayments or pay in lump sums. Paying off your mortgage early can also potentially save you thousands in interest repayments.
However, if you make underpayments and take payments holidays, the overall amount you owe will increase. Your mortgage repayments will be re-calculated to ensure the mortgage is still repaid in full by the end of the term.
And if you aren’t going to use any of the features of a flexible mortgage there’s no point having one because you will get a more competitive rate elsewhere. Most flexible mortgages have variable rates, some now coupled with attractive initial fixed or discounted rates to entice customers, but bear in mind you are still paying a slight premium for the advantages of being able to overpay without penalty.
Who does a flexible mortgage suit?
- People on a variable income such as those who get a monthly or quarterly bonus and can make regular overpayments
- Self-employed people who may have lean times can underpay occasionally when necessary
- For those who want to have a career break – to go travelling or have a baby, for example – the ability to overpay can allow them the flexibility to budget for a payment holiday later
Who does it not suit?
- First-time buyers who need stability and won’t have the means to benefit from the flexible features
- Those who are looking to minimise payments in the short term as flexibles may not provide the most competitive rates
- Those without the financial discipline to overpay enough to cover the ongoing temptation of underpaying the loan
Need to know
- Features of a flexible mortgage include the ability to over and underpay, and take payments holidays
- They enable you to pay off your mortgage early and save on interest
- You can withdraw funds up to a pre-arranged limit
- They suit people with irregular incomes and the financially savvy
- Rates are generally higher so you should make sure you’ll use their special features
Information source: Mortgage advisor & Home Buyer publication