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Benefits of flexible mortgages
Credit cards are often nicknamed your flexible friend - but mortgages can be more flexible than you might imagine, with product features that could save you thousands of pounds in interest and shave years off your term.
An array of mortgages now allow you to pay off the debt ahead of schedule - with many also offering payment breaks and the ability to use your savings to reduce interest payments, among other facilities.
In fact, only five lenders currently don't allow overpayments on any of their mortgage products. So while your mortgage term may have been set for 25 years, there's often no reason not to speed up your repayments.
The rewards of overpaying are eye-catching, and they do not have to be big lump sums to make a difference. "For a lot of people, standard mortgages offer enough flexibility. Most of them will allow you to make regular overpayments, without penalty, of up to 10% of the mortgage balance each year. For a mortgage of £100,000, for example, you could repay an additional £10,000 in a year without incurring early repayment charges," says James Cotton, spokesperson for mortgage broker London & Country.
Alternatively, if you are sure you can maintain higher repayments, you can ask your lender to reduce the term and increase your repayments automatically. But make sure you clear any debts with higher rates than your mortgage first.
Flexing it to the limit
Fully flexible mortgages allow underpayments, overpayments and repayment holidays as part of the package, boasting more leeway when it comes to how you repay the loan. These can be particularly useful for the self-employed, whose earnings tend to fluctuate, and for those taking a career break, having a baby, or with seasonal earnings.
Northern Rock, the winner of the flexible category of the 2007 Moneywise Mortgage Awards, has a wide range of fully flexible products which offer unlimited overpayments without charge - as long as you maintain a minimum balance of £1 on the mortgage.
Woolwich, the runner-up, is another big player.
"Northern Rock offers some pretty competitive rates on its flexible mortgages and compared to the best buys there isn't much in it, but make sure you shop around as many have much higher rates," warns Melanie Bien, associate director for independent mortgage broker Savills Private Finance.
Those who only plan to use the facility to overpay would be better off with a standard mortgage, as most lenders offer this facility, points out Ray Boulger, senior technical manager at independent mortgage broker John Charcol.
However, there are other useful options with flexible mortgages, such as the ability to take repayment holidays and make underpayments. Be aware, though, that these will have to be paid at some point. It may be wiser to build up a savings pot that you can dip into when your income drops rather than take a payment break.
Borrowers with fully flexible mortgages can often also draw down money at a later date from previous overpayments. This borrow-back facility usually costs far less than traditional sources of credit, such as loans and credit cards. "But there is also the danger that you never progress with the mortgage," Cotton adds.
Of course, there is a downside to the more flexible mortgages as there isn't the same amount of choice of fixed, capped and discounted rates compared to traditional mortgages, rates are not so competitive. Lenders' terms also vary dramatically - so make sure you check these carefully. "For those who make full use of these features, the higher rate is worth paying. For example, people who need to pay off substantial chunks off their mortgage would do well opting for a deal with no early repayment charges at any time," says Cotton.
The offset route
Offset and current account mortgages provide the ultimate flexibility. Intelligent Finance (IF), the winner of the 2007 Moneywise Mortgage Award in the offset category, is a well known provider off current account and offset mortgages. Runner-up First Direct has competitive rates, with long-term fixes of up to 10 years on its offset mortgage.
An offset mortgage allows borrowers to hold their savings, current account and mortgage in separate pots. The borrower can decide whether to use their savings to offset part of the mortgage pot. So if someone has a mortgage of £100,000 and savings of £15,000 they only have to pay interest on the difference of £85,000, for example. Offsetting is great for those who have a lump sum they would like to pay into their mortgage, but at the same time don't want to lose access to it.
Current account mortgages work in a similar way in that the balance of your savings and current account is offset against your mortgage, but the mortgage and current account are combined.
Higher-rate taxpayers enjoy the greatest advantage because they pay tax at 40% on interest from savings. If they offset, there is no tax to pay. They're also useful for those with substantial sums to offset, such as the self-employed who save for their tax bill, for example, or parents saving for school fees. "Rather than earning interest on your savings, you pay less in mortgage interest and cut your tax bill," adds Cotton.
According to IF, a borrower with a 25-year £100,000 IF mortgage and £15,000 in savings with IF would shave as much as £40,000 in interest and more than four and a half years off their mortgage. "If they linked in a current account and made overpayments they would save even more," says Heather Scott, head of communications at IF. But offset mortgages rely on a savings pot to make them worthwhile. Those with little spare cash should look elsewhere as mortgages rates are likely to be higher.
Unless you have a lot in savings that you're unlikely to spend in the foreseeable future, you would still be better off getting your mortgage on the lowest rate and keeping your savings in a high-interest account. Then, you can make overpayments as and when your mortgage and finances allow. Cotton recommends you have at least 10% to 15% of your mortgage in savings for offsetting to make sense.
So, if you have a lump sum or a little to spare every month it's worth finding out what you can do to speed up the repayment of your mortgage. Or if you are looking for a new mortgage, don't forget to think about how much flexibility you require when making your choice.
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