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UK Mortgages Guide
Flexible mortgages
Is a flexible mortgage right for me?
While most people would benefit from some of the features
of a flexible mortgage, such as daily interest calculation,
a full lifestyle mortgage is certainly not for everyone.
Below are some factors to consider when assessing whether
or not a flexible, current account or offset mortgage is
right for you:
- Almost half of all UK workers take home a variable amount
of income each month, with many millions of workers also
getting a monthly, quarterly or annual bonus. If you are
likely to have spare cash at some point in the future or
on a regular basis, than using it to contribute to your
mortgage can be better for you financially than many of
the other ways you have of spending it.
- Similarly, established homeowners on a settled income
who find themselves living in the comfort zone and spending
well within their means often find that overpaying on their
mortgage each month is one of the best uses for their spare
salary.
- The higher rates of pay that many contract workers obtain
allows some of them not to work for the whole year, perhaps
working for 9 months and then taking 2 or 3 months off,
for example. For such people, the ability to change the
terms of your repayments can be very useful.
- 13 percent of the UK working population are self employed,
many of whom often get paid in lump sums on the completion
of a piece of work or contract. The flexible approach to
repayment can be particularly useful in such instances,
as can the drawdown facility in helping to smooth seasonal
variations in income.
- Flexible mortgages are particularly appealing to those
with a long-term view of their mortgage. The benefits of
flexible mortgages can be seen most clearly over the life
of the product. If you are keen to find short-term savings,
then it may well be best to look at some of the alternatives.
- If you think it is likely that you will want to trade
up to a more expensive home in the future, the option of
overpaying can help you increase your equity in the home
more quickly, thereby giving you a larger deposit when it
comes to moving.
- This type of home loan can have a strong appeal if you
are considering a career break at some point in the future,
but do not wish to lose your homeowner status. A flexible
mortgage allows you to start budgeting early and overpay,
so that you can afford to take time off from your repayments
at a later date.
- Other borrowers may foresee the likelihood of extra expenses
in the future, such as the cost of raising children, extending
their house, adding a conservatory or starting a business.
The built-in credit facilities or valuation review can provide
a relatively low-cost method of obtaining finance for such
eventualities.
- Some borrowers that are planning for retirement and who
don't have a lot of monthly expenses enjoy the option of
reducing their mortgage debt while in a relatively cash
rich financial position.
- In certain circumstances, the features of a flexible
mortgage can be of particular benefit for buy to let investors,
as outlined on the previous page.
- Current account or offset mortgages offer a neat solution
for homebuyers who have savings in different accounts, but
who are unhappy with the low returns their money is generating.
- Current account or offset mortgages are a highly tax
efficient way of paying back a mortgage, particularly for
those who pay the higher rate of tax on their income. If
their money was held in a savings account, the interest
would be taxable at their highest rate of tax, but in a
mortgage-linked account, it is essentially 'earning' the
mortgage rate of interest and reducing the mortgage capital
without any tax burden whatsoever.
- Finally, for the financially sophisticated who are disciplined
with the money, there is arguably no more effective a way
to pay off your mortgage and minimise the overall interest
bill than with a flexible mortgage.
The potential pitfalls of a flexible mortgage are such that
there is sometimes a more suitable product for you:
- Interest rates are not as low as with the most competitive
discounted rates, so if you are looking for a way to minimise
your payments in the short term - which a great many buyers
are - it is often better to look at other options than a
flexible mortgage.
- For this reason, a flexible mortgage is likely to be unsuitable
if you are unlikely to take advantage of the different features
that it has. If you are never likely to overpay or deposit
a lump sum, then there will be little financial benefit
in taking out such a mortgage as the rate of interest can
usually be beaten elsewhere.
- Flexible mortgages, and current account or offset mortgages
in particular, require a certain amount of financial discipline
if you are to get the most out of them. If you don't feel
confident that you can always spend within your monthly
budget, then the more rigid approach of a traditional mortgage
may be more suitable. A flexible mortgage is not best used
as an emergency source of cash when your salary runs out
near the end of the month.
- If you are the sort of person who often only pays off
the bare minimum from your credit card bill, you may also
be better off with a more rigid loan. There is not such
a pressure to make a certain level of repayments with a
flexible mortgage and as has already been stated, underpaying
can end up costing you a small fortune in the long run.
- Similarly, if you are likely to overuse the drawdown,
underpayment and payment holiday features, this can cause
serious problems down the line. Such features can end up
being expensive in terms of the long-term interest payable
on the mortgage as they are essentially adding to your mortgage
debt in real terms - something that can hit you hard should
interest rates rise before you make up the difference by
overpaying.
- Many advisors prefer not to recommend flexible mortgages
to younger first time buyers, due to their relative unfamiliarity
with making regular payments on a mortgage. Another reason
that flexible mortgages are not as popular recommendations
for first time buyers is that they offer little genuine
protection against increases in the interest rate. Given
the difficulty that many young buyers have in getting on
the housing ladder, many are pretty stretched financially
once they have done so. Fixed or capped rates ensure that
the monthly outlay is fixed at a certain level for a period
of time without, regardless of what happens to interest
rates in general. If interest rates go up with a flexible
mortgage, you will be required to increase your repayments
to stay on your repayment schedule. While it may be possible
to keep your repayments at the original level, this would
mean you are underpaying and therefore adding to your interest
bill.
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