Four key reasons for a flexible mortgage

Flexible mortgages are structured so that you can over-pay, under-pay and even take payment holidays without incurring any penalties. Most flexible mortgages have their interest calculated daily, bringing about the full benefits of over-paying. Regularly over-paying without later under-paying could lead to your home loan being paid off sooner and save you thousands of pounds in interest.

1. Make mortgage payments that suit you

The first big advantage of a flexible mortgage is that you can vary your payments to adjust to your current financial situation and lifestyle. That could be a substantial boon to those with small families, facing childcare costs for the first time. At the same time, older 'empty-nesters' with more money could find a flexible loan a faster way of becoming debt-free.

2. You can clear your mortgage debt before the end of the loan term

With a flexible mortgage, you can repay the loan before the end of the term using regular over-payments, if you would like to. Why is that important? Apart from the obvious - saving vast sums of money in interest payments, its one way to stop the idle chatter round your dinner table! According to HSBC, a mortgage-free lifestyle is now the ultimate status symbol. A survey by the bank in October 2004 noted that seven out of 10 homeowners are so impressed when their friends say they have paid off the mortgage well within the usual 25-year repayment period that it can be a "dinner party conversation stopper".

The main features of a flexible mortgage are:

• It permits over-payments and under-payments and allows all over-payments to be drawn back.
• It gives you the option of repaying your loan before the end of the mortgage term.
• Interest is calculated daily thus saving you money when over-payments are made, even if the money is drawn back at a later date.
• You can vary the amount you pay back as long as you do not exceed your original mortgage borrowing.
• Some flexible mortgages allow you to use your mortgage account as a current account, giving you the ability to pool your money with the standard current account options of a cheque book and debit card.
• There are generally no penalties for early repayment.

On a £100,000 mortgage over 25 years, according to HSBC, a borrower overpaying £150 a month would knock eight years and four months off the total repayment period, saving a thumping £33,180 in interest payments. Putting a lump sum of £5,000 a year against the same mortgage cuts its life by almost 14 years - saving £52,380 in interest.

In the past people would repay their mortgage while keeping a separate "rainy day" savings account for emergencies and for planned future expenditure. However, a flexible mortgage does away with the need for a separate savings account, providing instant access to cash if you need it in a hurry while, at the same time, saving you interest on your mortgage debt.

3. You can save money 'wasted' in interest payments

A flexible mortgage has the potential to supply you with substantial interest payment savings. A simple sum will tell you whether you are wasting your time saving. If the interest rate on your mortgage is greater than the net, after tax, interest rate on your rainy day savings account then you would be better off addressing your savings to reducing your mortgage.

Flexible mortgages come with a lot of bells and whistles but also with a notable trap for the unwary. The bells and whistles include an offset facility, current account, cheque book and credit card, a couple of payment holiday options and, of course, the ability to repay the loan at anytime without penalty.

Sounds good doesn't it? This is where you have to beware of the trap. What pays for all these goodies is the fact that most flexible mortgage deals are at a variable rate. That means anybody who took out a flexible mortgage when the base rate was at its lowest level is likely now to be facing monthly payments around 40% higher than they were two years ago. That adds up to quite a premium when compared with the fixed and discounted offers available elsewhere.

So, are the bells and whistles worth the premium interest rate you are likely to be charged? The answer could still be yes if your circumstances dictate as much.

4. It is the perfect home for bonuses

If part of your salary comes in lump bonus payments, a flexible mortgage is the perfect home for such earnings - interest saved on your loan is likely to outweigh the amount you would normally receive from a savings account.

Those who are self-employed receiving substantial lump sum payments at infrequent intervals, such as lawyers and certain contract workers may find a flexible mortgage suitable, allowing them to offset their tax bill money against the mortgage for several months before the Inland Revenue demand it.

Others who would make good use of a flexible loan are those who need to draw down money at short notice at some as yet undetermined point in the future. Effectively you can have a much larger loan than you immediately need with the surplus cash sitting within the offset facility until it is required. Obviously you would only be paying interest on the amount actually drawn down but you would have the peace of mind of knowing that the funds are available when you need them.

10 November 2005 © Moneyextra.com

back

Moneyextra.com recommends you should consider taking independent financial advice before acting on any article. Please contact us for help with your individual circumstances if any assistance is required.