Flexible mortgages explained
There isn't a fixed definition of flexible mortgages although they tend to share several common features.
Firstly there is typically the option to make overpayments without penalty, and to either make underpayments for some time or to take payment holidays.
It's usually the case that you can only apply to make underpayments or take payment holidays once you have had the mortgage for a certain period, in some cases you may have to overpay before you can make an underpayment.
It's generally accepted that all flexible mortgages should have a daily calculation of interest which is important if you do make overpayments as it means that extra capital will instantly reduce the interest portion of your payments.
This can make a significant difference to total interest repayable over a mortgage, however, there are relatively few mortgages nowadays with monthly or annual interest calculations anyway.
Another previously common feature of flexible mortgages was to have a drawdown facility, allowing you to borrow a fixed amount of extra funds at any time without requiring new approval.
This was usually agreed as part of the loan to value limit of the mortgage.
For example, if you remortgaged and your loan to value was 72% the lender may have agreed that you can borrow up to 3% of the valuation at any future date without requiring new income verification or valuations.
This feature might even have been available through a cheque book or credit card tied to the mortgage account which allowed access to the extra funds available without even having to approach the lender to withdraw the money.
Care needed to be taken though with the terms and conditions around extra borrowing to ensure no nasty surprises.
These drawdown facilities are now very rare and are no longer offered by most lenders, mainly due to changes in regulation that oblige lenders to consider affordability before advancing additional funds.
However, offset mortgages can provide an alternative to these features by allowing you to borrow funds you only pay interest for once drawn down.
This is another feature which may make part of a flexible mortgage arrangement. An offset mortgage includes a linked current account and any funds in this account accrue no interest.
A current account feature which offsets balances against the mortgage interest can help to chip away at your mortgage balance as even if the account is only full for a couple of weeks in the month it still means you make an effective overpayment every month.
Many products from high street banks now meet flexible mortgage terms as standard however there is still a broad range of difference between the rules applicable to each lender particularly around overpayments and early redemption penalties.
The pros and cons of flexible mortgages
- Features which make the mortgage easier to live with
- Daily calculation of interest
- Possibly option for regular or unlimited overpayments
- May include offset facility or linked current account
- Drawdown facilities may be included offering further borrowing at competitive costs
- Some features may only be available after several months
- Some features may cease being available in arrears
- Arrangement costs and interest rate may be less competitive