We explain how to make the most out of a flexible mortgage.
Flexible mortgages allow overpayments and underpayments to be made against your mortgage without penalty costs being incurred.
Being able to control when and how much you repay means that you can overpay when you have spare cash. Conversely, if you find yourself short of money you can repay less than you would normally, skip a payment or even borrow money against the capital repaid.
However, with repayments being under your control rather than being defined by the mortgage lender, you need to maintain discipline when repaying a flexible mortgage. Making too many underpayments, or skipping too many payments without readdressing the shortfall with overpayments will result in you having to extend the period over which you repay your mortgage. This will subsequently increase the amount of interest you have to repay.
In light of this potential problem, it is advisable to follow this simple rule; Overpay when you can. Underpay only when you really need to.
Not all flexible mortgages are equal as the conditions imposed do vary. Some restrict how much you can overpay during a specified period by setting either a lower or upper limit on the additional repayment amount. For example, some lenders will only allow you to make additional payments over £1000. Some lenders will not allow you to make an additional payment of more than £100 per month.
Restrictions can also apply to borrowing against the capital already repaid. In fact, some mortgages labelled as 'flexible' do not allow you to borrow any money against your mortgage. If borrowing is permitted you should check how easy it is to access the cash you require. Do you need to make a formal request or are you able to simply withdraw cash from an account?
There is a type of flexible mortgage that helps you to make even more of your money; the 'current account mortgage'. With this type of mortgage, you current account balance is offset against the outstanding balance on the mortgage. For example, if you have an outstanding mortgage balance of £50,000 and a current account balance of £1,500, your mortgage interest will be based on an outstanding balance of £48,500.
Even if you only ever have your monthly salary paid into your current account, the balance of which gradually falls as the month progresses, you can still save hundreds if not thousands of pounds over the period of the mortgage as the outstanding balance is calculated on a daily basis.
Advantages
- You can pay off your mortgage early, without penalty, by making overpayments.
- You can borrow against mortgage overpayments or equity in the property more easily, and at a lower interest rate than a 'standard' loan. (dependent on the type of flexible mortgage)
- You are able to change mortgage at any time without being penalised as there are no early redemption penalties.
- You can benefit from a fall in the Bank of England's base rate that leads to a subsequent fall in your lender's standard variable rate.
Disadvantages
- Making too many underpayments could result in extending the mortgage repayment period.
- The Bank of England base rate can be unpredictable and can increase rapidly, resulting in an increase in your monthly payments.
- It is less easy to budget as the interest rate can and will vary.
- A fall in the base rate will not always result in an equivalent fall in the lender's standard variable rate. (unless the flexible mortgage offers a tracker interest repayment)
NB This information is provided to give you an overview of the different types of mortgages available. It is not comprehensive and you should not base your mortgage decision on the information found here. We recommend you seek professional advice in order to determine the most suitable mortgage for you.
