Flexible mortgages
The Key Benefit Of Flexible Mortgages
The ability to overpay on your mortgage combines with daily
calculation of interest rates to offer the single most significant
feature of flexible mortgage.
If you make regular overpayments for a period of time or
a lump sum deposit on your mortgage you are reducing the
outstanding balance ahead of schedule. In short, this means
that if you then continue with normal repayments until the
mortgage is paid of, you will reach the end of your term
earlier and having paid a significantly lower total amount
in interest than you would have done if you had stayed on
your original repayment curve.
Any amount that you pay over and above your monthly repayment
is entirely going towards reducing the mortgage debt as
the interest charges are met your normal monthly repayment.
This means that the capital you owe is reduced by the amount
you have overpaid. As a result, the amount of interest you
owe each month is reduced, as it is being calculated on
a smaller amount of capital than would have been the case
if you had stuck rigidly to your repayment plan. This in
turn means that a smaller portion of your ongoing repayments
is being used to pay off interest on the loan, while a larger
amount is being used to reduce the capital, therefore speeding
up the rate at which the loan is paid off. The more overpayments
you make, the faster this effect works, particularly in
the early months and years of a mortgage, when the interest
makes up a bigger proportion of your normal monthly payment.
This effect is amplified by daily calculation of interest
on the mortgage balance, which results in reductions to
the calculated interest charges from the day the extra funds
hit the mortgage account.
Small regular overpayments and single lump sum deposits
can lead to savings in the overall interest bill ranging
from just a few pounds to many tens of thousands of pounds,
depending on the size of your mortgage and how aggressively
you are willing to overpay your mortgage.
If a borrower overpays by £50 each month on a loan of £100,000
taken out over 25 years at 5.49%, the customer can save
over £14,000 in interest payments and cut the term of the
mortgage by over three and a half years. Ramp this up to
a £130,000 loan and an overpayment of £200 each month on
a slightly higher but still realistic rate of interest such
as 6.2% and the mortgage could end up being paid off 8 years
early with savings of nearly £50,000.
Because borrowing almost always costs more than saving,
it is usually well worth homeowners who have relatively
poor-paying savings accounts instead putting their money
into their flexible mortgage. They benefit from instant
interest savings on their mortgage, whilst still retaining
the right to re-release the money in the future.
Some people are put off from flexible mortgages by the
fact that they can find more attractive heavily discounted
headline rates elsewhere. Flexible mortgages don't always
offer the most competitive rates, but in the long term they
can save offer greater savings by making your money work
harder for you, as well as offering various features that
you may be grateful of should some unforeseen circumstance
befall you.
