Flexible Mortgages

Flexible mortgage – a recent addition to the mortgage market, this type of loan has interest calculated on a daily basis, so any payments are credited immediately. To be classed as fully flexible, it also gives you the ability to make overpayments without penalty and to make underpayments or take payment holidays.

Crucially for many borrowers, flexible loans allow you to “draw down”, or borrow back, from any overpayments that you have made. This encourages a culture of overpaying on your mortgage. This is a highly tax-efficient use of your money, since the savings you make in mortgage interest payments are effectively giving you a tax-free return on your money. When you pay extra off your mortgage you are effectively earning interest at the mortgage rate, assuming you are paying the lender’s Standard Variable Rate (typically about 6.50%).

Better still, you would have to earn a gross rate of 11.25% from your savings account (as a higher rate taxpayer) to equal the financial benefit of overpaying on your mortgage. Even the best paying accounts in the country can only offer about half that.

To be fully flexible, the mortgage should allow you to leave it without paying an Early Repayment Charge, but many flexible mortgages come at a fixed rate or with a discount, bringing an ERC along with it.

It all amounts to an attractive proposition, but at mortgagesplease we would offer a word of caution: most people love the sound of flexible loans but, in reality, end up using very few of the flexible features on offer. Most simply want the ability to overpay: this is available on many other loans, often at cheaper rates.

Flexible mortgages – pros and cons:

PROS:

-         A flexible mortgage can work well for someone with a fluctuating income, such as the self-employed, or people who work on commission.

-         You can make make overpayments, enabling you to pay off your mortgage early and potentially save large amounts in interest payments

-         The flexibility enables you to over- and under-pay and take payment holidays.

-         You can borrow back any overpayments if you need to.

-         Flexible mortgages give you a large amount of control over your finances and offer the potential to save money if used properly.

CONS:

- This type of mortgage is usually offered at a slightly higher rate of interest than usual.