Mortgages

Few of us would turn down the idea of saving around £30,000. But that is how much you could slice off your mortgage interest rate bill if you had a flexible mortgage and cleared your debt early.

Flexible mortgages

Flexible mortgages have only been around for a couple of years but they are already proving very popular with people who expect to be able to make overpayments on their home loan.

Historically mortgages have been taken out over a set period – most frequently 25 years. The only time most people have thought about paying their mortgage off early is when they are moving home or changing lenders. However, even with a regular mortgage you can make big savings by paying a little bit extra each month. Based on a £70,000 loan, a leading bank calculates that an extra £10 per month will mean paying off the mortgage in 24 years and saving £3,387 in interest.*

Overpay by £50 a month and the debt is cleared in just over 20 years and you will have saved yourself well over £16,000 of interest.*

The trouble with making an extra payment every month to some lenders is that it will sit around for up to 11 months doing you no good. That is because many traditional lenders calculate interest on an annual basis.

Interest on flexible mortgages

This system means the interest you pay on your mortgage is calculated on the amount of the outstanding debt at the beginning of the lender's financial year. So any overpayment will not start working for you until the lender's year end.

But interest on the best flexible mortgages is calculated on a daily or monthly basis. That means any over payment is working for you immediately. So if you have an £80,000 flexible mortgage where interest is calculated daily, you can cut the interest rate bill over the life of the home loan by around a third – £30,000 – if you overpay by £100 a month*

And the savings do not stop there. It will also mean clearing your debt almost 8 years early – in just over 17 years. So for a total outlay of less than £21,000 you will save yourself all those extra repayments which tot up to a mouthwatering £47,000.*

Of course, few of us can guarantee to be able to pay a set amount extra off our mortgage every month. But that is the joy of a flexible mortgage because you decide when you make an overpayment and how big it will be.

On the other hand a flexible mortgage also allows you to take payment holidays or even borrow back some of the money you have already repaid. And the cost is only the interest rate being charged on the mortgage.

Check the small print

However, the rules do vary between lenders so you need to check the small print. With payment holidays, for instance, you may only be allowed to miss one or two payments a year and even then you will normally have had to agree it with the lender first.

Some flexible mortgages are linked to bank accounts to provide even more benefits. In these cases your mortgage is effectively like a giant overdraft. You usually have to agree to have your salary paid into the same account but because interest is calculated daily, you benefit from a reduction in your debt right up to the point where you spend the money.

At a time when many current accounts are paying a rate of less than 0.5% gross AER (This means ”Annual Equivalent Rate“ and illustrates what the interest rate would be if interest was paid and compounded each year.) You are effectively earning interest at whatever the going rate is on your mortgage.

With a current account linked flexible mortgage, someone with an £80,000 home loan and an annual salary of £45,000 could save themselves £4,560 in interest and reduce the term of their mortgage by 38 months even if they never overpaid anything.*

Is it for the financially disciplined?

If you are the sort of person who is financially disciplined then a current account flexible mortgage may be a good idea. However if you tend to live hand-to-mouth you may find the facility to borrow up to your agreed limit too much of a temptation. One solution may be to go with a lender who issues warnings if you are falling behind with repayments.

Originally flexible mortgages were only available at the standard variable rate - and in some cases you even paid a premium. Now there are special deals that combine flexibility with discounts, fixed and capped rates. Standard Life Bank, for instance, is currently offering a 1.33% per annum discount on its variable rate which is already nearly a full percentage point below most lenders' variable rates.

Switching from another lender

And if you are switching from another lender, Standard Life Bank will pay the standard valuation fee and your legal fees provided you use one of the solicitors on its legal panel. The maximum loan is 90% of the home's value and there are no mortgage indemnity premiums.

Not all flexible mortgages carry all the features, so you need to work out which ones appeal to you most. If you want the all singing, all dancing version then consider Standard Life Bank, Bank of Scotland, First Active, Virgin or Legal & General. You will get limited flexibility from the Woolwich, Yorkshire Bank and Mortgage Express.

Do visit your IFA

A visit to your Independent Financial Advisor will save you having to do the shopping around. *Source: Halifax, assuming 6.85% APR with MIRAS. Rates may vary.

Written quotations are available on request. Security is required. YOUR HOME IS AT RISK IF YOU DO NOT KEEP UP REPAYMENTS ON A MORTGAGE OR OTHER LOAN SECURED ON IT. Mortgages are subject to status.

“Your home is at risk if you do not keep up repayments on a mortgage or other loan secured on it.”

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