Flexible Mortgage

A flexible mortgage gives you some scope to change your mortgage payments to suit your ability to pay. 

It's also useful if you want to pay off your loan more quickly.
Several flexible features are becoming increasingly common and they are not necessarily confined to loans that have 'flexible' in their name. 

Consider which of the features below are important to you.

Overpayments

You can pay more than the normal monthly mortgage payment and/or pay off extra chunks of the loan. The overpayments can have two effects:

• you could benefit straight away from lower monthly interest payments (because the amount you owe is now less); OR

• you could continue paying at the higher level and pay off your loan more quickly. Sometimes you can cut years off your mortgage if you overpay regularly.

To get the benefit of overpayments straight away, choose a mortgage where interest on what you owe is calculated daily or monthly.

True flexible mortgages will not penalise you for making overpayments, however with some other mortgages, especially fixed rate mortgages, you may have to pay an early repayment charge.

Underpayments and Payment Holidays

You pay less than the normal monthly payment for a limited period (say, six or 12 months). You may even be able to stop making payments altogether. This could be useful if, say, you lose your job or take time off to care for a child.

Most lenders require you to have built up some overpayments first. While you are making underpayments or taking a payment holiday, interest continues to be charged and added to the outstanding loan. This means that you will have to pay higher repayments in future to get back on track, or you might need to extend the term of your mortgage to keep the normal repayments affordable. Either way, you will usually end up paying more for your mortgage in the long run.

Borrow extra (sometimes called 'loan drawdown')

You can borrow extra without further approval from your lender, provided the total loan does not go over an overall limit. Alternatively, you may be able to 'borrow back' against earlier overpayments. With a more traditional mortgage, you usually need to apply for a top-up loan which could take longer to arrange.

These flexible features are just one aspect of a mortgage. You also need to consider the other features, the cost of the mortgage, and the type of interest rate. 

Is a Flexible Mortgage right for you?

It could be if you are likely to use these features, for example you are self-employed and receive a variable income, and all other aspects of the mortgage meet your needs then look for a mortgage that has these features. 

Possibly not, if you are unlikely to use these features. A mortgage that is not as flexible may be cheaper or more suitable for you because, for example it charges you a lower interest rate, or offers you the security of fixing your payments for a period of time.

Offset Mortgage

With an offset mortgage, your main bank current account or savings accounts (or both) are linked to your mortgage (and are usually, but not always, held with the mortgage lender). Each month, the amount you owe on your mortgage is reduced by the amount in these accounts before working out the interest due on the loan. 

For example: If you have an interest-only mortgage of £100,000 and have savings in your ‘offset account’ of say £25,000, you pay interest on £75,000.
If, in the next month you spend £5,000 and so only have £20,000 in your ‘offset account’, you pay interest on £80,000.

So, as your current account and savings balances go up, you pay less on your mortgage. As they go down, you pay more. 

They can also be tax-efficient if you pay tax on your savings. This is because you do not earn any interest on your savings and so don’t pay any tax on them. Instead you pay less interest on your mortgage. This amount is usually greater than the interest you would have earned after tax on your savings, if they were not offset against your mortgage. This benefit is greater if you are a higher rate taxpayer. 

With some lenders, the savings accounts of family members can be combined to offset against one person’s mortgage. This could be useful if, say, you want to help your child buy their first home.

Current Account Mortgage

A current account mortgage is similar to an offset mortgage in that it ‘offsets’ the balance of your ‘savings’ against your mortgage. However in this case, rather than your mortgage and current account being separate pots of money, they are usually combined into one account. This means that the account acts like one big overdraft.

The mortgage lender will draw you up a plan which includes the minimum amount you should leave in your account each month to repay your mortgage over the agreed mortgage term. If you leave more than this in your account then you pay less interest and may pay your mortgage off early but if you leave less in your account each month, you will end up paying more for your mortgage.

Is an offset or current account mortgage right for you?

It could be if you are a higher rate taxpayer, have substantial savings to offset and like the idea of the built in flexibility to make overpayments and underpayments.
Possibly not, if after paying your deposit you don’t have much left in savings, and if other mortgages have a lower interest or other features which are more important to you. 
 
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