Flexible Mortgages

Be able to over- or underpay, and take payment holidays

In a Nutshell...

• The ability to over and underpay, and take payments holidays are features included in a flexible mortgage.
• They enable you to pay off your mortgage early and save on interest. You can withdraw funds up to a pre-arranged limit.
• They suit people with irregular incomes and the financially savvy.
• Rates are generally higher: make sure you will use their special features.

What are they?

When flexible mortgages were first introduced in the mid-1990s, they radically changed the face of the UK home loan market.

The standard features of a flexible mortgage are:

• You can make overpayments without incurring early repayment charges. This means you can pay off your loan more quickly, paying less interest. Equally, there will be no charge should you decide to pay the mortgage off in full.
• You can make underpayments for one or more months during a period of reduced income or extra expenditure, with the lender's permission. Most lenders require you to have built up a sufficient overpayment reserve although some allow you to underpay from the start.
• Every overpayment has an instant effect on the total amount you owe as interest is calculated daily rather than annually. Your balance is instantly reduced and no further interest is charged. Equally, underpayments are reflected straightaway in the balance.
• You can take a break from paying the mortgage for one or more months. Some lenders limit the frequency of underpayments or holidays, some only permit them after six, 12 or 24 months, and others do not permit them in certain circumstances, such as redundancy.
• You can withdraw money up to a pre-agreed borrowing limit, or up to the sum of your previous overpayments. Interest is charged at the same rate as the mortgage, so it's a cheaper way of borrowing money than through personal loans or credit cards.

Flexible mortgages are most suitable for:

• People on a variable income such as those who get a monthly or quarterly bonus and can make regular overpayments.
• Self-employed people who may have lean times can underpay occasionally when necessary.
• For those who want to have a career break - to go travelling or have a baby, for example - the ability to overpay can allow them the flexibility to budget for a payment holiday later.

Costs and charges

You can reduce the term of your mortgage by several years if you make regular overpayments or pay in lump sums. Paying off your mortgage early can also potentially save you thousands in interest repayments. However, if you make underpayments and take payment holidays, the overall amount you owe will increase. Your mortgage repayments will be re-calculated to ensure the mortgage is still repaid in full by the end of the term. There's little point having a flexible mortgage if you aren't going to use any of its features, because you will get a more competitive rate elsewhere. Most flexible mortgages have variable rates, some now coupled with attractive initial fixed or discounted rates to attract customers, but bear in mind you are still paying a slight premium for the advantages of being able to overpay without penalty.

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