Flexible mortgages
Other Features Of Flexible Mortgages
Different lenders have quite different ideas about what
makes a mortgage flexible and there is no single definition
of what constitutes a flexible mortgage. There are at least
two-dozen flexible mortgages now on offer and you would
be hard pressed to find two that are identical, but they
combine some or all of the following features:
- Daily interest calculation
Having interest calculated daily instead of monthly or yearly
can have tremendous advantages. Any overpayment that you
make has an immediate effect on the outstanding balance
of your debt. The knock-on effect of this is that you immediately
start benefiting from the savings on the interest that is
charged on the loan capital, as there is a smaller loan
to charge interest on.
With an annual calculation, you don't see the benefits
of the reduction in outstanding capital until the interest
is recalculated. Any repayments you make are only deducted
from the balance once a year, until the interest is recalculated,
you are being charged interest on money you have already
paid back.
Remember that the reverse is true if you underpay or pay
late. With a monthly or yearly interest calculation, you
may not suffer from additional interest as long as you catch
up before interest is recalculated. When it is calculated
daily, you immediately start falling behind schedule in
terms of reducing your outstanding capital.
Some so-called flexible mortgages still calculate interest
on a monthly or annual basis, due to unwillingness or inability
of lenders to change legacy systems. Clearly this minimises
the impact of overpaying and you should make sure that any
'flexible' mortgage that you choose calculates interest
on a daily basis.
- Making overpayments without penalty
You should be able to make individual or regular overpayments
without penalty. Some lenders allow a limited number of
annual overpayments and some set a minimum lump sum that
you can overpay. These limits are put in place to ensure
that the cost of administering the mortgage account does
not escalate, with £500 and £1000 both being fairly common
limits for lump sum overpayments. But most flexible lenders
do not put such limits in place, meaning you can make regular
monthly overpayments of as little as £10 or £20. Even such
small amounts can lead to savings worth thousands of pounds
over the life of your mortgage.
- Underpayments
Many mortgages now allow you to reduce your mortgage payments
for a period of time if you need to. This has the reverse
effect on the interest bill to overpaying, but can still
be a really useful feature if you need a break for whatever
reason.
Some flexible mortgages only allow you to underpay after
you have been paying back the loan for a period of time,
or once you have built up a reserve by overpaying. In such
cases you may only be allowed to underpay up to the amount
of the reserve that you have built up. This helps ensure
that you never fall behind your original payment schedule.
- Payment holidays
As well as accepting underpayment, some lenders allow you
to take a holiday from repayments altogether. Payment holidays
vary in length, with some holidays defined by time and others
letting you take a holiday up to a certain level of credit,
usually either preset or derived from the length of time
you have been repaying your mortgage.
- Drawdown facility.
At the very least, a flexible mortgage should give you guaranteed
fee-free drawdown access to any overpayments that you have
made. Any overpayments are held in a reserve that can then
be released if you need it. This is the equivalent to keeping
savings in your mortgage account, allowing the money to
reduce the interest on your mortgage.
While the money is in the overpayment reserve, it is 'earning'
the mortgage rate of interest, with the added bonus that
your repayment curve will be moving forward meaning lower
subsequent interest charges on the entire mortgage. Some
lenders do not fix the drawdown facility to be equivalent
to your overpayments. Instead, they allow you to borrow
back to some other level, sometimes right back up to the
limit of the loan. There may be other limits on your drawdown
facility, such as only one withdrawal being allowed per
year, up to a fixed limit.
- Valuation review
If you are using the drawdown facility to improve your home,
it is sometimes possible to have the property revalued after
the work is complete. If the value has increased, it may
mean that you can increase your borrowing limit in line
with the value of the property. Additional funds can then
be raised for further work or other purposes.
Like other mortgages, flexible products can have a tiered
interest rate that alters according to the LTV of the mortgage.
As a result, a revaluation may lead to the loan to value
ratio of your mortgage falling below the threshold for a
lower rate of interest. As a result, you may find that the
lower rate of interest allows you to either reduce your
monthly repayments, or maintain your payments and shorten
the term of your mortgage.
- Payment frequency
Some flexible mortgages allow you to repay your loan in
ten instalments per year as opposed to twelve. You can schedule
when these payments are and this allows you to cope with
shifts in earnings, or seasonal expenses such as Christmas
or summer holidays. You can also sometimes choose to make
your repayments weekly or fortnightly rather than monthly.
- Current account facilities
Some flexible mortgages have full current account facilities
that allow you to run the mortgage account as you would
your normal bank account, with a cheque book and debit card.
This is explained in more detail in the next section.
- Redemption penalties
It is not common to find flexible mortgages with long periods
of early redemption penalties. Many do still have them in
the first year, however, as the lender usually tries to
at least cover the set-up costs of the loan.
- Term
Because of the ability to increase and reduce your payments
and the effect that this can have on the amount of debt
outstanding, flexible mortgages do not always run for a
fixed term. You may have a target date on which the loan
will be repaid, but it is not usually as rigidly fixed as
with other more traditional mortgages.
- Statements
When a mortgage has daily interest recalculations, you often
get monthly mortgage statements as opposed to yearly ones.
This allows you to gauge your progress towards paying off
your loan, the size of any drawdown reserve that you may
have and whether you ought to increase or decrease your
spending next month to stay on track.
