You no longer have to choose a fully flexible mortgage to get the benefits of many of the features associated with them. What Mortgage magazine helps you find the sort of flexibility you really need.
The word ‘flexible’ is one that seems to have only positive connotations, so it’s little wonder that many of us are attracted to flexible mortgages. We’re told we can make overpayments to clear the debt early, take payment holidays or make underpayments when financial pressures come to bear, and even borrow extra cash if we need to make a substantial purchase further down the line. But not everyone will use all the features, so – as it’s no longer necessary to restrict yourself to a fully flexible deal to get some of the benefits – it’s worth considering what you want from your mortgage and then shopping around to find it at the best price
Overpayments
What are they? A lender will tell you how much you need to pay monthly in order to clear your mortgage by the end of your chosen term. Where an overpayment facility is available, you can make larger payments each month and pay off lump sums from time to time.
Why would I want to? ‘By making overpayments you are killing two birds with one stone,’ says Alan Dring, head of sales at Standard Life Bank. ‘You’re potentially reducing the period of your mortgage and you’re saving money.’ The sums don’t have to be big to have an impact on the overall cost of your loan. According to Skipton Building Society, on a repayment mortgage with a rate of 5.50 per cent, originally arranged over 25 years, increasing your monthly payment by just £50 to £665 would cut the cost of your mortgage by £13,960, thus reducing the repayment term by three years and eight months. Rather than overpaying to clear your mortgage early, if you choose a deal with underpayment and drawdown facilities you can overpay and buy yourself breathing space when money is tight.
Where can I find them? ‘The majority of lenders now allow overpayments to a certain extent on many of their products,’ says Rob Clifford, managing director of broker Mortgageforce. Nationwide Building Society, for example, allows borrowers to overpay by up to £500 a month on its fixed-rate and discount deals and offers unlimited payments on its fully flexible loan. Meanwhile, HSBC allows all borrowers to make overpayments of up to 20 per cent of their regular repayments.
How do I use them? Your lender may help you arrange overpayments at the outset. This is the case at Yorkshire Bank, says marketing manager Martin Allton. ‘At the initial interview the adviser will discuss what you are comfortable with overpaying each month,’ he says. This is reviewed each year but, in common with most lenders, the bank will let you increase your overpayments any time you want. Lump-sum payments can be made at any time: by post, in a branch or sometimes even online. Some lenders add the extra payments to your mortgage account, while some hold them in a separate account. Standard Life calls this your Prepayment Reserve, while Bristol & West directs the money to an offset account. Dominic Toller, spokesman of Bristol & West, explains: ‘Overpayments are put in your offset account and labelled differently so you can see how much you can borrow back.’
Underpayments and holidays
What is it? Flexibility means being able to reduce the amount you pay each month or to take a break from monthly repayments. This is where the terms and conditions applied by lenders tend to differ.
Why would I want them? Perhaps you foresee a period when you will have less money. ‘If people indicate that they are planning a baby-break or may experience regular income interruptions – for example they’re contract workers or freelancers – the adviser would look at these features,’ says Rob Clifford. The features could also be useful on a buy-to-let mortgage where borrowers might experience void periods.
Where can I find them? These facilities are less common than overpayment facilities and may only be offered on a lender’s flagged-up flexible mortgage. Even on a fully flexible loan they may be restricted.
How do I use them? You will have to give your lender notice that you intend to take a break or underpay; otherwise it will assume you have defaulted on your mortgage. Whether the lender agrees the holiday or underpayment will often depend on your history of payments. Martin Allton explains: ‘The minimum criterion is that the mortgage cannot run beyond the 25-year term or the end of the agreed term.’ In effect, this means you can only take a break or underpay if you have overpaid in the past.
There are mortgages, however, that allow breaks without overpayments. Standard Life Bank, for instance, will allow you to take up to two months off each year as long as you have made six consecutive payments. Bristol & West permits breaks from day one as long as you have a further loan facility agreed. See ‘Drawdown’ (below) for more on this option.
Drawdown
What is it? On some mortgages you can borrow back any money you have overpaid on the deal; on some you can apply for extra borrowing up to a limit agreed when you took out your loan. Bristol & West’s Dominic Toller explains: ‘If you borrow £75,000 but you’re good for £100,000, from day one you have a further loan facility of £25,000. Any time you want to borrow any of that money you can give us a call.’ At Standard Life Bank this fund is called a Cash Reserve.
Why would I want it? If you expect to make an expensive purchase in the period while you have the mortgage, this may prove more cost-effective than using a personal loan. You may not want this facility enough to apply for a mortgage on the basis of it, but if the loan you want has this facility you have nothing to lose. While the money sits there unused you don’t pay for it, and when you draw it down you usually get it at your mortgage rate.
Where can I find it? This kind of facility doesn’t tend to be available on standard mortgage deals, but many lenders do allow extra borrowing. On a fully flexible deal this facility will only be available if you don’t borrow the maximum available to you at the outset, or build up equity through overpayments.
How do I use it? The reserve will be set up when you apply for the mortgage. To use it you need to contact your lender. The extra amount you have borrowed will be scheduled over the remaining term of your mortgage, unless you request otherwise.
Daily interest
What is it? Interest on your mortgage is calculated daily rather than annually as in the past.
Why would I want it? There’s little point making monthly overpayments on your mortgage if they don’t reduce your balance until the end of the year, and this is what happens if interest is only calculated once a year. If interest is calculated daily, overpayments have a greater effect on the total cost of your debt – which means, of course, you immediately start paying for any extra borrowing through drawdown.
Where can I find it? Pretty much everywhere these days.
How do I use it? You just make your monthly repayments and let the lender get on with it.
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